The wise King Solomon never encountered the Internal Revenue Service, yet his advice for managing money and prospering can guide nervous entrepreneurs who fear an audit for claming an entirely legitimate tax break: the home office deduction. “Be not afraid of sudden fear,” he says in Proverbs 3:25. And thanks to some surprising latitude in the tax code as well as a major change for 2013, there’s no reason to avoid claming your home workspace on your taxes
The home office is among the most widely abused of tax deductions, with people claiming everything from the living room table to a backyard, so many entrepreneurs think that even listing a home office, however legitimate, will trigger an audit. But the latitude for a real home office claim is surprisingly wide, and you may still be able to claim it even if you employ a property manager or company to take care of the day-to-day business of your properties.
The main criterion for a legitimate home office deduction is that the space you claim must be dedicated to the business you run. It might simply be a computer desk in a corner – but it still has to be reserved for conducting business. Any other expenditures related to that space are also deductible, such as a phone used for business, Internet service, or a laptop used just for work.
Since we’re talking about a home office, you can also deduct a percentage of household bills such as utilities, mortgages, or even home alarms based on a straight percentage of space. For example, if a home office occupies 10 percent of space in the home, then 10 percent of those home expenses can be deducted.
For home business professionals who see clients in their home offices, deductions can even include things like landscaping, lawn care or painting And even if you do business away from home, such as meeting with tenants and property managers on the site, a home office deduction still applies, if it’s only used for administrative work such as handling bills or managing files.
Another reason home businesspeople feared the home office deduction is the paperwork. Itemizing and filing separate tax documents can be intimidating and time consuming. But the IRS found it a burden too. So for 2013, the home office deduction has been radically streamlined, making it easier for anxious entrepreneurs to claim the deductions they deserve.
Rather than round up all the receipts and calculate all the percentages, the IRS has created the new EZ Option for Home Office Deductions, which allows entrepreneurs to simply claim $5 per square foot of a home office up to a maximum of 300 square feet. The downside? It’s not possible to claim depreciation under this option.
Home based professionals can still do it the old fashioned way too, with itemizing and documenting –and, according to tax professionals that might be best if your office exceeds that 300 foot limit or your write offs would run over $1,500. In any case, the home office deduction is an important part of the income property deduction package –worth taking as part of Jason Hartman’s strategies for building wealth in real estate. (Top image: Flickr/gorogen)
Eisenberg, Richard. “Secrets of Claiming a Home Office Deduction.” Forbes Investing. Forbes.com 16 Aug 2013
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