Decoding home office deductions

At some point or another, most taxpayers may have heard that claiming a home office deduction raises an automatic red flag at the IRS that may trigger an audit. However, home office deductions are legitimate for taxpayers who fall in line with the rules and individuals who truly qualify for this tax break should not be afraid to write-off these expenses.

The trick is in knowing all of the rules. Home office deductions can be complicated for taxpayers who are unaware of the rules, and in these cases, it's best that individuals consult a tax preparer to complete their income taxes. But it's still important to know the basics for independent contractors, freelancers and, in some cases, employees, who plan to claim the deduction.

First, in order to claim a home office deduction, taxpayers must use a part of their home exclusively and regularly as a principal place of business or a place to meet and deal with clients, customers or patients in the normal course of business. This means that if a freelancer uses his or her desk as a place to solely conduct business functions, he or she may claim the space as a deduction. But, if the freelancer also uses that space to perform other functions, such as paying personal bills, or lets his or her kids use the space to do their homework, this does not qualify under the rules.

In some cases, telecommuting employees may also qualify for a home office deduction. However, he or she must work from home solely for the employer's convenience in order to qualify. This means that if the employer does not have enough space for the employee and prefers that he or she work from home, the employee may qualify. But if the worker simply does not want to make a long commute, even though the employer has a work station ready, the employee cannot claim the deduction.

It's also important to note that home office deductions are based on a percentage of the home or apartment that is used for business purposes. This means individuals may have to measure the square footage space that is used for business purposes and only claim costs in relation to this area. For example, if a taxpayer's office space is 100 sq. feet in a 1,000 sq. foot home, he or she may only deduct 10 percent of costs relating to rent, insurance and utilities. 

 

About Liberty Tax Service
Liberty Tax Service is the fastest -growing retail tax preparation company in the industry’s history. Founded in 1997 by CEO John T. Hewitt, a pioneer in the tax industry, Liberty Tax Service has prepared over 8,000,000 individual income tax returns. With 42 years of tax industry experience, Hewitt stands as the most experienced CEO in the tax preparation business, having also founded Jackson Hewitt Tax Service.

Liberty Tax Service is the only tax franchise on the Forbes “Top 20 Franchises to Start,” and ranks #1 of the tax franchises on the Entrepreneur “Franchise 500.” Each office provides computerized income tax preparation, electronic filing, and online filing through eSmart Tax.  
Posted To: Tax Ranger's Blog By: Tax Ranger On: Tuesday, November 15, 2011
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