Freedom of Working from Home

As we approach the Fourth of July holiday weekend, in the US we take time to celebrate the declaring of independence of the colonies from Great Britain.  We have many freedoms to celebrate in the US and I wanted to take a moment to point out a huge benefit many Americans enjoy - being able to work from home.

From a personal standpoint, this allows flexibility for self-employed and employees that telecommute for work. You can work in an environment that is as comfortable as you want to make it. Working from home also offers short commutes, casual wardrobes and comfortable rest breaks.

From a tax standpoint there may be some benefits as well but there are some criteria to meet to be eligible for a tax break.  To qualify for the deduction, you generally must maintain a specific area in your home that you use regularly and exclusively in connection with your business. So that means the kitchen table will not qualify as exclusive use.  What’s more, you must use the area as your principal place of business or, if you also conduct business elsewhere, use the area to regularly conduct business, such as meeting clients and handling management and administrative functions. If you’re an employee, your use of the home office must be for your employer’s benefit.

The only option to calculate this tax break used to be the actual expense method. With this method, you deduct a percentage (proportionate to the percentage of square footage used for the home office) of indirect home office expenses, including mortgage interest, property taxes, home owner association fees, insurance premiums, utilities (if you don’t have a separate hookup), security system costs and depreciation (generally over a 39-year period). In addition, you deduct direct expenses, including business-only phone and fax lines, utilities (if you have a separate hookup), office supplies, painting and repairs, and depreciation on office furniture.

But now there’s an easier way to claim the deduction. In just the last couple of years, the IRS has introduced a simplified method, much like the standard mileage rate for business use of a vehicle. Under the simplified method, you multiply the square footage of your home office (up to a maximum of 300 square feet) by a fixed rate of $5 per square foot. You can claim up to $1,500 per year using this method. Of course, if your deduction will be larger using the actual expense method, that will save you more tax.

I recommend discussing this topic with your tax advisor to see if this is applicable to you.  Also many folks remember this being a RED FLAG when claimed on a tax return but with the advancement of technology and many home based businesses, this has become more common of a deduction.  It is important to make sure that you document the usage of the space and be sure you qualify for the deduction.

Have a happy and safe Fourth of July holiday!