If you are self-employed, or own a business then you may qualify to take the home office deduction. Although people often say it is an audit red flag, there are actually millions of Americans who claim the home office deduction each year without running into any trouble with the IRS. Just make sure you meet the following requirements, are honest about your expenses, and you can benefit from the home office deduction without any IRS problems.
Designated Room or Space
In order to qualify as a home office – in the eyes of the IRS – you need to have a separate room or designated space that is used exclusively for business purposes. If it is not a room, then the space needs to be separated by a room divider of some sort. Additionally, the IRS is very strict about the exclusive use rule, so if your children play in the office or your spouse uses the room as a home gym then it will not qualify.
Principal Place of Business
According to the IRS, your office must either be the principal location of that business, or a space where you meet with clients regularly. If you work exclusively from home then you can easily prove that the office is your principal place of business. However, if you have another office away from home, you will need to show that you regularly meet with clients from your home office.
Calculating the Deduction
In calculating your home office deduction you need to know both the total square footage of both your home and your designated home office. This is because your home office deduction will be based off of the percentage of your house used for business. For example, if your home is 1500 square feet and your office is 150 square feet then your deduction would be calculated using 10%. Meaning, you can deduct 10% of your rent and indirect expenses.
Direct and Indirect Expenses
In addition to deducting a percent of your rent or mortgage, you can also benefit from direct and indirect business expenses. Any money spent to repair or maintain your home office is fully deductible. For example, if you paint your office or buy new office furniture then you can deduct the associated costs.
Indirect expenses related to doing business from your home office can also make for valuable deductions. If your office is around 15% of your home’s total square footage then you can deduct that percentage of your yearly utility bills, homeowners insurance, security, home owners association fees, etc.
Early last week CEO Roni Deutch posted a new entry to her personal blog with 10 money-savvy New Year’s resolutions. As the blog entry explains, 2010 is a great year to get your finances in order, and it is never too early to begin your yearly tax planning. You can find a few of the items listed below, but be sure to check out the full text at Roni Deutch: The Tax Lady Blog.
1. Shop Smart
The average family in America spends $700 or more per month on food, much of which goes to waste. This year, how about making a resolution to eat out less or save money on food by planning your meals in advance and buying in bulk. If you enjoy eating lunch out with coworkers every day, then you might consider making a resolution to only eat lunch out once a week.
2. Do Not Be Lazy
No one likes to admit it, but laziness can cost you a lot of money. I am talking about that overdraft fee you had to pay for not depositing your paycheck right away or that late fee you had to pay a few months ago for forgetting to send your rent in on time. This year, take a more proactive approach to life and you will be surprised to see how much easier it is to manage your finances. By keeping your bills organized, balancing your checkbook, and keeping a budget, you can take control of your money.
3. Cut out Credit
Credit cards are so common now that people do not think anything of using them on a regular basis. However, this is dangerous, and can cost you thousands of dollars per year in interest. Instead, why not make it a resolution to pay with cash or your ATM card unless absolutely necessary.
4. Quit Something Pricey
Are you ignoring a habit that is costing you a lot of money? Whether it is smoking, shoe shopping, or even gambling, many of us have at least a few pricey habits. By making a resolution to cut out your bad habit, you can find yourself saving quite a bit of money this year. Some might not even need to be quit all together. If your indulgence is ordering expensive cocktails with dinner then you might try making a drink at home before you go out. On the other hand, if your pricey habit is buying lots of electronics then you could make it a resolution to reduce your spending.