Who Should Take Advantage of the Home-Office Tax Deduction


Who Should Take Advantage of the Home-Office Tax Deduction

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Question: I have recently started my home-based business as a notary signing agent. I don’t have a whole room, but rather a corner of our studio where I have my computer, printer, scanner, and cell phone set up and do all my business operations. Can I apply the home-office tax deduction? How?

Answer: Most likely you can take a tax deduction for your home office. The IRS rule says that your home must be your “principal place of business,” which means you have no other primary workplace–such as a desk in a mortgage broker’s office or a cubicle at a bank branch.

It is likely that you travel to client sites to oversee and notarize document signings for lenders and title companies, rather than have clients come to your home to sign loan documents. But if you are administering your business from your home office and use your home office “substantially and regularly,” in IRS terminology, it should qualify for the deduction. (Of course, it does not hurt to check with a tax professional about your home-office deduction, just to be safe.)

The second part of the IRS test states that your home office must be used “exclusively for conducting business.” It “doesn’t matter if it’s a table in the kitchen or a whole room, as long as it’s only used for the business,” says Wenli Wang, a tax partner at Moss Adams in San Francisco. “You can’t sign your personal checks there or help your daughter with her homework there.”

As a self-employed individual, you will likely file Schedule C, Profit or Loss From Business with your 2013 individual tax return, assuming you are operating as a sole proprietor. The Schedule C is where you’ll report your business income and expenses and calculate how much tax you owe, if any. Along with Schedule C, you use Form 8829, Expenses for Business Use of Your Home (PDF) to calculate your home-office deduction.

Generally, deductions for a home office are based on the percentage of your home devoted to business use. So you’ll need to measure the area of your studio that you’re using to run your business and then figure out what percentage of the total square footage of your home that area constitutes, Wang says. (For instance, if your home office takes up 100 square feet of your 1,000-square-foot studio apartment, you’re using 10 percent of your home for your business.)

Starting this tax year, you have two options for claiming the home-office deduction. A simplified reporting option allows you to write off $5 per square foot up to 300 square feet of home-office space, for a total tax deduction of $1,500. If you were to use more than 300 square feet for your home office, or you wanted to take a depreciation deduction for the portion of your home used for business, you’d want to use the standard reporting option.

A comparison of the two options is provided here at the IRS website.