If you work out of your house you should take advantage of the home office deduction, especially if you are an independent contractor. The home office deduction is available to homeowners and renters. there are two basic requirements you must meet to use this deduction:
From the IRS website – “The term “home” includes a house, apartment, condominium, mobile home, boat, or similar property which provides basic living accommodations. It also includes structures on the property, such as an unattached garage, studio, barn, or greenhouse. However, it does not include any part of your property used exclusively as a hotel, motel, inn, or similar establishment.”
These are the only exceptions to the exclusive use rule.
Your home office is your principle place of business if:
Administrative activities include: Billing customers or patients, Bookkeeping, ordering supplies, scheduling appointments, and writing reports. If you are a blogger and you have an office in your home where you write your posts, you can take the deduction. If you have a room or office in your house where you normally meet clients or patients, you qualify for the home office deduction. Using your home for occasional meetings, telephone calls or checking e-mails does not count. A business where you use Skype to from your home to conduct business will also qualify.
There are two ways to figure your deduction amount.
The simplified method is call the “simplified method” because its simple. Take the square footage (up to 300 square feet) of the space you in your home for your business and multiply it by $5.00. If your home office is 100 square feet, your maximum deduction is $500. The most you can deduct using the simplified method is 300 x $5 or $1,500.
Using actual expenses to figure your deduction is not as simple as the simplified method… To figure your deduction using actual expenses you will need to add up the expenses that can be used for the deduction. You must also know the percentage of your house that you use for your business. Some expenses are direct and some are indirect. Direct expenses are things you use only for the business use of your home. If you have a separate internet service for your office, you can deduct all of the cost because its a direct expense. The same goes for a separate land line telephone. Indirect expenses are bills you pay for your entire home such as gas and electric, mortgage interest, and insurance.
After you total your expenses you must calculate the percentage of your house that you use for your business. The easiest way to do this is take the square footage of the space you use and divide it by the total square footage of your house. So if your house is 2,000 square feet and your home office is 150 square feet, your business percentage is 2,000/150 or 7.5%. You would multiply your indirect expenses by 7.5%. If your indirect expenses are $4,000 your deduction for indirect expenses would be $4,000 x .075 or $300.
The limit for your home office deduction is based on how much net income you make in your business. If you had $10,000 in sales or other gross income and had $8,000 in expenses other than your home office deduction, then your limit is $2,000. If you you had $10,000 in sales and $9,500 in expenses before your home office deduction, then your home office deduction limit is $500. In this example if you calculate your deduction and it is $1,000, you can carry $500 to next year and use it then. Here are a couple of examples:
|GROSS INCOME||GROSS INCOME|
|CONSULTING FEES||5,000.00||CONSULTING FEES||5,000.00|
|WEB STORE SALES||5,000.00||WEB STORE SALES||5,000.00|
|TOTAL INCOME||10,000.00||TOTAL INCOME||10,000.00|
|WEB HOSTING||500.00||WEB HOSTING||500.00|
|CELL PHONE||1,200.00||CELL PHONE||1,200.00|
|COST OF GOODS SOLD||3,800.00||COST OF GOODS SOLD||1,800.00|
|TOTAL EXPENSES||9,500.00||TOTAL EXPENSES||7,500.00|
|NET INCOME||500.00||NET INCOME||2,500.00|
|HOME OFFICE DEDUCTION||1,000.00||HOME OFFICE DEDUCTION||1,000.00|
|TAXABLE INCOME||0.00||TAXABLE INCOME||1,500.00|
|CARRYOVER TO NEXT YEAR||500.00||CARRYOVER TO NEXT YEAR||0.00|
There are a lot of rules for the home office deduction. But taking this deduction will save you income tax. If you are an independent contractor you will save on self employment tax as well. Remember to keep accurate records and all of your receipts and consult a CPA with any questions!