Work From Home Tips: Is Your Home Office Really Deductible?
Work from Home Tips
If you work from home, can you always take the home office deduction?
I visited a friend who has her own work from home business which she runs from her condo. This particular friend, let’s call her Sharon, likes to work at her dining room table so she can look out the window.
Papers strewn, a laptop, and an array of ‘stuff’ clutter the table, and over my raised eyebrow, as I looked with horror, she smiled and laughed, “Isn’t the view incredible?” My retort was, “Darling, the tax authorities do not care about your view.”
The reality is that as a growing number of people work from home, very few that I have encountered actually understand how a home office should be structured. A desk in a playroom, doing ‘business’ from a kitchen counter, a laptop in the bedroom – I have seen it all.
Not long ago, I did a keynote speech for a large company. One of the presenters was espousing the joy of such flexibility – that she could work anywhere in her house because of her work from home business – and that people shouldn’t worry about having a home office.
I bit my tongue and my head literally started pounding. Yes, you shouldn’t worry… until the IRS knocks on your door, or until you get the mega tax bill because you were not taking proper deductions from the comfort of your kitchen table.
Leading tax expert and CEO of The Tax Reduction Institute, Sandy Botkin, says people who are self-employed and work from home are 700% more likely to get audited. If you are serious about working from home, then you must have a legitimate home office. In US tax code there are three essentials for being able to deduct your home office.
Here are the three rules to consider when determining the status of your work from home office:
* Exclusive Use – You must use a specific area of your home only for your trade or business.
* Regular Use – You must use a specific area of your home for business on a regular basis. Incidental or occasional business use is not regular use – even if you work from home all the time.
* Principal Place of Business – You can have more than one business location, including your home office, for a single trade or business. To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that trade or business when you say you “work from home“.
Also, keep in mind that there are essentially three types of home office deduction spaces:
* Defined – A defined space is an office that has walls and a door. There is no other purpose for this room other than being an office. This form of office gives you maximum allowable deductions and is much more ‘airtight’ from a tax deduction point of view than either of the other spaces.
* Semi-Defined – A semi-defined space infers that there is an office ‘area’ in a room that also has other uses. This space must not have any other purpose. For example, if your office area is in the kids’ playroom the kids cannot use your desk for their homework or toy storage. If your office space is in a living room, or other room, it is ideal to have a dividing screen or some other form of barrier between the office space and other use space.
* Multi-Use – A multi-use space is sketchy at best. Essentially, if you have to move your laptop, documents, and other paraphernalia in order to have a meal, let’s say, or something else then chances are you are kissing your deductions good-bye. Many tax auditors would laugh at this and frankly anyone trying to take square-footage or other deductions on a multi-use space is very likely shining a neon sign on their head that says, ‘please audit me.’
In my course, Organize Your Life for Entrepreneurs, I teach you how to set yourself up properly when you work from home and make the most of your deductions.
I bring in a CPA who is well versed with both Canadian and U.S. tax law. The sad truth is that entrepreneurs who work from home usually fall into two camps – those that do not take enough legitimate deductions and those that try to take the wrong deductions. If you are in the first camp, you could be missing hundreds, if not thousands, of dollars of legitimate tax savings on their home offices alone. The truth is that the view may be stellar from your kitchen table; however, it is not as good as the view that could be had at the beach using some of the money saved by properly setting up your home office.
Susan Sly: Susan Sly is a productivity specialist, work life balance expert, best-selling author, speaker, trainer and entrepreneur. She has appeared on CNN, CNBC, Fox, Lifetime Television, The CBN, The Morning Show in Australia and been quoted in Forbes Magazine Online. Susan is the author of 7 books. Her book project with NY Times Best Selling Author, Jack Canfield, made six Amazon Best Selling lists. Susan is the mother of five children and resides with her husband in Scottsdale, Arizona. Susan truly believes we can have it all.
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