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The home office deduction is probably the most misunderstood deduction - misunderstood by non-tax professionals, of course - among all the entries in the tax code.
For years people were afraid using the home office deduction would raise an automatic red flag for auditors, but in recent years Congress has relaxed the rules and the home office is far less likely to attract attention. Keep in mind that even if you are audited, as long as you have prepared your tax return - whether corporate or personal - accurately and under the provisions of the law, an audit is, at worst, a hassle.
To understand the rules regarding home office deductions, we'll start with the basics. Your home office qualifies as your principal place of business if:
The above rules apply even if you maintain another office, as long as you don't use that other more than on an occasional basis for administrative or management activities. For example, if the company provides space for an office but you only use it to store non-essential items, your home office should qualify for a tax deduction.
Now let's look at the requirements in more detail:
To prove you meet the time and use requirements, keeping a log (which can be as simple as making notes on your daily planner) can be helpful if you are audited.
If the space qualifies under the above guidelines, you are allowed to deduct home office expenses.
To determine what you can deduct:
Qualifying expenses include:
Home office expenses can be used to offset income, but only to the break-even point; you are not allowed to show a loss. If your expenses do create a loss, you are allowed to carry those losses forward to future years to offset future income. For example, if home office expenses are $2,000 and you only make $1,500, $500 in loss can be carried over to the following year(s).
One quick note: Married homeowners can still claim the $500,000 tax-free capital gains exclusion ($250,000 for single homeowners) when the home is sold as long as the home office space was not considered a "separate dwelling unit" (for example, a separate building not connected to the home).
The keys to taking the home office deduction are to accurately determine the percentage of the home allocated for business use and to keep accurate records of all expenses deducted. If you have questions, see a qualified accountant or financial professional for individual guidance specific to your situation.