Home office tax pros and cons

Since I'm bogged down here in my home office today and don't have a lot of time to blog, I thought a few words about the tax considerations of working from your residence might be appropriate.

The Taxpayer Advocate's recent report to Congress cites government data showing the number of home offices jumped about 20 percent between 1999 and 2005. The report also estimates that slightly over half of small business are home-based. But, according to the report, "many" business owners don't take the home-office deduction.

One reason home-based workers avoid it: The home-office tax deduction has long been considered to be an automatic invitation to a tax examiner. But that's not necessarily so. Really! I swear that's what tax experts tell me!

Another reason some taxpayers don't claim the deduction is that it's complicated and demands more record keeping and additional tax-filing duties. Plus, if you hire a professional to do the job for you, you face added costs.

But in many cases, it's worth the trouble.

The key, as with all business deductions, is to get the most of the tax break while also attracting the least attention from the IRS. To do that, you need to know the rules (following them is implicit!) and substantiate, substantiate, substantiate!

When you do that, you'll be able to claim the deduction, reduce your tax bill and keep the IRS happy, too.

Now I have to get back to my home office duties with regard to a paying client, so let me direct you to a couple of articles with much more about the home office tax break.

This story I did for Bankrate takes a look at the depreciation component of claiming a home office.

Tom Herman, who writes the weekly Tax Report for the Wall Street Journal, recently examined the fear factor associated with the deduction in this article.

You also should check out these six questions to ask when setting up a home office. And Work.com has a collection of home-office stories here.

Comments

[Virtual Office Birmingham]

appreciating your reviews, helpful those who really no much about tax like me. i have a small business and i want to open in my home basement, what do you think is this a good idea. i have a website to run.

[New York Office Space]

Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

as your principal place of business, or

as a place to meet or deal with patients, clients or customers in the normal course of your business, or

in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

[virtual office]

Thanks for explaining this matter, I want to know better about tax in home office because I'm planning to have one. thanks for this valuable post.

Margarette Smith

[Donahue]

Thanks for enlightening me about tax deductions for home office work. I learned something new today.

Have you ever came across the Young Entrepreneur Society from the www.YoungEntrepreneurSociety.com. It is a great resource for home entrepreneurs.

[Kay]

There's another component in the deduction called "employer convenience." If you are an employee who also works at home, you must meet the same home office standards as do self-employed taxpayers. However, as an employee, your use of a home office to do your job must be for your employer's convenience.

There are no hard-and-fast rules when determining whether your home's business use is for your employer's convenience. It depends on all the facts and circumstances.

The bottom lime: The way the work world has changed is not always accurately or adequately reflected in the tax code. We'll just have to keep bugging our lawmakers to catch up with us!

[Vancouver realtor]

I do appreciate your explanation of this system. As a Vancouver real estate agent I`m thinking of split my duties to perform some at home which means that I would spend 3 days at home 3 in the office. Do you think that exist any tax deduction considering this case? I`ve read through so many articles dealing with the topic and allegedly there should be another allowences for example if you rent a house you should have another favourable deals on your bills. etc.