Should you Claim a Deduction for your Home Office?

Should you Claim a Deduction for your Home Office?

Working from home is oftentimes a dream for most folks sitting at their 9-to-5 jobs, wishing they could tell their boss what’s what. However, for others the idea of working from home is a reality, and one that brings with it a number of changes, stipulations, and sometimes tough decisions.

Those who have a home-based business, probably have had their fair share of dealings with an asset based line of credit or some sort of business loan from Dealstruck or another lending institution. I have found that a lot of folks who work from home think that all, or at least a small portion, of the loan can be deducted from their taxes. Unfortunately, this is not true. For the most part though, what you use the loan to purchase can probably be written off.

Home office tax deduction
photo credit: Lending Memo

One of such purchases revolves around a certain deduction that can be claimed when filling out your online tax return. You see, the typical person working from home will usually have a room in the house designated as a home office. This home office may qualify as a deduction when the tax man is harking on your doorstep. The question now though — should you claim it, or not?

Claiming home office tax deductions: Things to consider

While most deductions are usually beneficial in terms of receiving a hefty refund, this type deduction in particular can be quite meticulous and complicated, and it is probably the only deduction you will ever face that requires a tape measure to calculate. If that were not daunting enough, just take a look at the excessively long, annoying piece of paperwork — Form 8829 — composed of a whopping forty-three lines.

For those who rent their home, apartment, sublet, etc., the deduction for a home office is much simpler to calculate compared to that of an outright homeowner. For a renter, it is all a matter of measuring out the square footage of the room or space that is being used as a home office. From there a percentage can be formulated that can be used to determine the appropriate deduction amount. However, homeowners have a much more difficult time because a number of variables are presented that need to be factored in. For instance, a homeowner has the option of deducting a percentage of their mortgage, utility bills, home repairs, and even the depreciation on the house.

Another unfortunate side effect of the home-office tax deduction is that is makes one more susceptible to being audited by the ever-so-popular Internal Revenue Service (IRS). Claiming this deduction, as most lawyers will tell you, may in fact increase the risk of an audit. The IRS has a complicated formula that they use to assess a taxpayer’s chance of being audited and, in the end, the home office deduction is just another factor.

There is a bright side to the whole situation though; after all, it is a deduction. When pursued properly and successfully, the estimated average deduction totaled more than $2,500, which is a fairly sizable amount compared to other deductions commonly taken at tax time. Also, according to an announcement made by the Department of the Treasury, the process of claiming the deduction for a home office is going to become much simpler starting with the 2013 tax season. The simplification process mainly revolves around making the calculations much less confusing by simply allowing a taxpayer to write off a certain dollar amount per square foot of the office space.

Home office setup
photo credit: Gregory Han

Decision, decision…

So now it is time to determine whether or not the home office tax deduction is worth claiming or not. Under certain circumstances, the deduction can be worth more than $2,500, but those same circumstances can land you on the IRS’s audit list and the last thing you want is an IRS suit knocking on your door wanting you to produce every receipt you ever received.

Be sure that the space you are using as a “home office” is actually an office. If you are merely using a desk strategically placed in your home’s dining room, then perhaps this deduction is not for you. The IRS does have requirements set that should be met if the deduction is to be successfully claimed with less hassle.

Ivan Widjaya

Ivan Widjaya is the Owner/Editor of Noobpreneur.com, as well as several other blogs. He is a business blogger, web publisher and content marketer for SMEs.