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Home Based Worker Tax Breaks

I’m Working From Home – Can I Deduct That?

Are you among the increasing numbers of home based workers?  As a home based worker, there are tax advantages available to you.  We are often asked what tax breaks are available.  

The home office deduction is available to individuals using a portion of their home in a trade or business.  First, we must go over the rules to see if the deduction applies to your situation.

A portion of the dwelling unit must be used exclusively, on a regular basis, as the:

  • principal place of any trade or business for the taxpayer; or
  • place of business used by patients, clients or customers.

If you are an employee, use of your home must also be for the convenience of your employer. 

Any use for a nonbusiness purpose will disqualify the space for the home office deduction.

Once it has been determined the rules are met, there are two methods for calculating the deduction.

 

First, the Actual-Expense Method is an allocation, typically based on square footage, taken for expenses such as the following:

  1. Mortgage interest
  2. Real estate taxes
  3. Insurance
  4. Utilities
  5. Depreciation

These deductions are reported on IRS Form 8829 Expenses for Business Use of Your Home. 

The second is the new Safe Harbor Method, just released by the IRS for the 2013 tax year.  The Safe Harbor Method takes the allowable square footage (not to exceed 300 square feet) and multiplies it by $5 (there is a maximum deduction of $1500, annually).  Under this method, the mortgage interest and real estate taxes are still allowed as itemized deductions on Schedule A of the 1040.

There is a caveat under the Actual Expense Method.  When the house is later sold, the depreciation must be recaptured, whereas under the new Safe Harbor Method no recapture is required.

The other major difference is that any unused deduction, due to the gross income limitation of the business, can be carried over to another tax year under the Actual-Expense Method whereas no carryover is allowed under the Safe Harbor Method.

Should you feel you qualify to deduct a portion of your home, talk to your accountant about which method is best for your situation.  

The information provided is for informational purposes only and is not inclusive.  Please consult your tax advisor for more information on how this affects you!