04 Feb What Are The Benefits Of The Home Office Deduction
Would like an extra $20,000 in your bank account every 5 years? On average, that is what the home office deduction yields to our clients. This article will explain the benefits of this most often overlooked deduction, and how to document this valuable tax deduction.
Three Easy Rules
The latest Internal Revenue rules became effective on January 1, 1999—and they are easy. To gain the benefits I will describe, you must use your home office:
- For administrative or management duties
- Exclusively for business
- Regularly for business
Administrative or managerial activities
The IRS says, “There are many activities that are administrative or managerial in nature. The following are a few examples:
- Billing customers
- Keeping books and records
- Ordering supplies
- Setting up appointments
- Writing or forwarding orders”
Do you pay bills for your business? Keep the financial records? Read the business mail?
These are the type of things that qualify as administrative or managerial duties.
Exclusively for Business
You must use the room, rooms, or area exclusively for qualifying business use as an office and for no other purpose.
Think proof! How do you prove exclusive use?
One case we researched the taxpayer proved his exclusive use by showing that the room he used as an office contained only business furniture and no personal-use furniture like a TV, sofa, or bed. Also, excellent additional proof is to take a picture of your home office.
Regularly for Business
You must exclusively use your home office on a regular basis for the administrative or managerial activity. In the Green case, the Court ruled that Green’s use of the home office for approximately 10 hours per week met the regular-use test. Unlike some other cases where the court found the use not regular, Green used his office every week, except for vacations. Therefore, make your use repetitive and frequent to ensure that it is regular.
Another substantial benefit from the home office deduction it to eliminate commuting miles to and from work. The IRS says, “ If you have an office in your home that qualifies as a principle place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business”.
You May Have More Than One Office
Again quoting from the IRS publication, “ You can have more than one business location, including your home, for a single trade or business.”
Is the Home Office Deduction a Red Flag?
In a recent survey, 3,000 self-employed taxpayers who claimed the home office deduction were asked if the IRS had audited them during the past 5 years. Their responses showed the IRS had audited almost none of them. My experience has been the same.
The rules for the home office deduction put cash in your pocket from the very place that you live and vehicle you drive. You do not need to find a different place to live, or purchase an expensive vehicle.
Small Business Owners need to devote more time to understanding the rules and building proper documentation. This understanding and minimal time each day can potentially equate to $20,000+ in after-tax cash in your pocket!