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Tax Talk: Home Office Deductions

If you operate a business out of your home, you may be able to deduct a wide variety of expenses. These may include part of your rent or mortgage costs, insurance, utilities, repairs, maintenance and cleaning costs related to the space you use. But, it can be a tricky area of the tax code that is full of pitfalls for the unwary. Don’t make these common mistakes:

1. Not taking the deduction

This is probably the biggest mistake those with home offices make. Some believe the deduction is too complicated, while others believe taking a home office deduction increases your chances of being audited. While the rules can be complicated, there are now simple home office deduction methods available to every business.

2. Non-exclusive use of space

The space you use must be used exclusively and regularly for your business.

Exclusively: If you use a spare bedroom as a business office, it cannot double as a guest room, a playroom for the kids or a place to store your hockey gear. Any kind of non-business use can invalidate the deduction.

Regularly: It should be the primary place you conduct your regular business activities. That does not mean that you have to use it every day, nor does it stop you from doing work outside the office. But it should be the primary place for business activities such as recordkeeping, billing, making appointments, ordering equipment or storing supplies.

3. Mixing up your other work

If you are an employee for someone else in addition to running your own business, be careful in using your home office to do work for your employer. Generally, IRS rules state you can use a home office deduction as an employee only if your employer does not provide you with a local office where you can work. Unfortunately, this means if you run a side business out of your home, you cannot also bring work home from your employer’s office and do it in your home office. That would invalidate your use of the home office deduction.

4. The recapture problem

If you have been using your home office deduction, including depreciating part of your home, you could be in for a future tax surprise. If you later sell your home, you will need to account for this depreciation. This depreciation recapture rule creates a possible tax liability for many unsuspecting home office users.

5. Simplified home office deduction

Recognizing the home office deduction complexity, the IRS created a simplified “safe harbor” home office deduction. Simply take the square footage of your office, up to 300 square feet, and multiply it by $5. This gives you a potential $1,500 maximum deduction. However, your savings could be much greater than $1,500, so it is often worth getting help to calculate your full deduction.

6. Not getting help

There are special rules that apply to your use of the home office deduction if:
• You are an employee of someone else.
• You are running a daycare or assisted living facility out of your home.
• You have a business renting out your primary residence or a vacation home.

The home office deduction can be tricky, so be sure to ask the talented team at Laciak>cpa for help, especially if you fall under one of these rules.

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