Guest Blogger: Susan Cartier Liebel, Build A Solo Practice, LLC
First, let me say I am not an accountant and do not play one in the blogosphere. But it is important to emphasize the tremendous cost savings associated with having a home office that seldom get discussed. And those benefits have to do with the tax advantages.
Millions of Americans are now working from their home, either operating their own independent business or telecommuting. And with this benefit (besides not having to pay the high cost of gasoline, commuting numerous hours per week or contributing to global warming!) there are significant tax deductions one can be eligible to take. But it isn’t just the deductions to look at, because if you were renting an office space you could deduct this, too. It is the fact that you are already paying for your home or apartment, this money is already leaving your wallet. Now you are getting more bang for those bucks. You are getting benefits for what you already spend, not having to earn more for a rental space to then get the deduction.
But before you can enjoy these benefits you have to realize the IRS is no longer the enemy of the home office lawyer. Most people fear the deduction because they assume that it is a red flag for the dreaded audit. The reality is (and this comes from a friend who has worked for the IRS for years) only one half of one percent of filers is audited. This number may have inched up recently due to other factors, but it is still minuscule. The IRS does not use a home office deduction as an automatic trigger to audit.
What are the rules to follow if you decide to create a home office based law firm? If you are ever the subject of an audit you should take photographs of your working space that you are declaring. This will show the purpose of the room. Is it being used solely as an office? Is there a partition in the room clearly separating your work space from the other functions of the room?
The Connecticut Society of CPAs provides the following criteria to determine if your ‘space’ qualifies under the rules for a business deduction: ( I cannot provide the link as there is none.)
(Paraphrased)
Test No. 1: Regular and exclusive use.
To qualify for the home office deduction, you must use your home office regularly and exclusively for business. "Regularly" means that you us it often, not necessarily every day. However, occasional or incidental use doesn’t qualify, even if the room is used solely for business. "Exclusively" means that you must use the space you designate as your home office for work only.
Test No. 2: Principal place of business.
Your office also must be used either as a place to meet with clients in the normal course of business, or as your principal place of business. Your office will qualify if you spend most of your working hours there and most of your business income is attributable to your functions there such as calling clients, billing clients, keeping records, calling vendors, etc.
Determining what is deductible.
When you work from a home office space that qualifies under the rules you are eligible to fully deduct all expenses associated with your home office including equipment, decorations and supplies. In addition, you can deduct a percentage of indirect expenses such as mortgage interest, property taxes, utilities, homeowner’s insurance, maintenance, repairs and depreciation. The amount you may deduct all turns on the percentage of square footage: if 10% of your home square footage is home office; you can deduct 10% of allowable expenses.
If you are into cutting overhead and maximizing dollars you already spend to live in your dwelling this is a very viable option IF other circumstances in your life make it suitable as well.
Considering a home office requires thoughtfulness. It has to work with all your objectives, not just financial. It may be for a short period of time or it may be a permanent working strategy. But it must work with your personality and your needs first in order for it to be the right choice for you.
Again, always consult an accountant for the most relevant tax advice to your unique situation.
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