Are you afraid of raising any red flags when you miss indicating the work from home tax deductions on your tax returns? When it comes to filing taxes, there must be no stones left unturned. Otherwise, this may raise suspicion. Here’s a guide on how you can calculate home office deduction and properly settle your dues without fear of an Internal Revenue Service audit.
Work from Home Tax Deductions | What You Need to Know
1. What is Work From Home Tax Deductions?
Work from home tax deductions can save you hundreds or even thousands of dollars if you know how to play your cards right. This tax hack allows you to write off some expenses like part of your mortgage and utilities. This is applicable if your home is your primary and exclusive place of business. Hence, this doesn’t apply to double-duty space such as furniture in your living room or the dining room table.
2. Audit Risks
What are the chances of you facing an IRS audit? First, if your income increases, the chances of getting audited also increases. For the past seven years, 12 percent of taxpayers with earnings of more than a million dollars ended up getting audited. Meanwhile, four percent with earnings ranging from $200,000 to $900,000 received an IRS audit, and about one percent with less than $200,000 in earnings got the institution’s attention.
Based on that data, IRS got their eyes on those who bring in more. What’s important for you to know is if you fail the audit and the IRS disallows the deduction, you’ll be hit with penalties and interest.
3. Ways to Calculate from Home Tax Deductions
There are two ways to calculate the percentage of your work from home tax deductions and that is through square foot and the room method. The former requires you to divide the square footage of your office by the square footage of your home. You may maximize this further by subtracting the square footage of common areas in your home like stairs, hallways, and garages. For example, 200 sq ft office/1,600 sq ft home = 12.5 percent deduction of your expenses.
The latter requires you to divide the number of room/s used for business by the number of rooms in the house. Bathrooms, garage, and closets are excluded. Assuming only one room is used by business and there are five rooms in the house, that equates to a 20 percent tax exemption. Feel free to use both methods and use the one that will benefit and give you the highest deduction.
4. Different Types of Home Office Expense
As mentioned above, this only applies to a part of your home where you conduct your trade and entertain customer, clients, or patients. That means you can’t use it as a bedroom or watch TV at night. Here are the two types of expenses you can take on your home office deduction:
- Direct – Exclusively for the home office and are items you can write off 100 percent. Examples are painting your home office, buying carpets, or if you remodel a bathroom located inside the office.
- Indirect – These expenses benefit the entire home so here’s where the square foot and room method comes in. If you’re paying for rent, mortgage interest, utilities, insurance, security system among others, multiply it with whatever percentage is higher and the resulting amount is the amount you can write off.
5. Where to Report Home Office Expense
What forms do you need to fill up when reporting to the IRS? Sole proprietors use the form 8829 and Schedule C. LLC or partnerships use Schedule E part 2 and along with 1040. Lastly, if you’re running a corporation, use Schedule A since you can’t take it as a direct business expense.
6. The Payoff
If you’re qualified for home office deductions, take advantage of it! Doing extra paperwork will likely net you a significant amount of returns you may use to reroll in your business.
7. Tax Reminders
Before wrapping things up, here are pointers that will definitely come in handy. Keep good records and never miss a deadline. A clean reputation always goes a long way. Also, take a photo of your home office in case you get audited and keep receipts since you need to prove that expense.
8. Bottom Line
The home office deduction shall not be a cause for concern as long as you know your options. Also, qualifying for the home office deduction is determined every year, so if you qualified in 2017, things might be different in the succeeding years. Deducting a home office also varies depending on your business type, hence the different forms you need to submit. Lastly, the square foot method is the easier way to qualify for deduction but will more likely result in a lower deduction.
Here are some helpful tips on how to optimize work from home tax deductions courtesy of 180 Law Co. LLC:
Who will say no to lower taxes, right? If the opportunity presents itself, you shall definitely apply for a work from home tax deduction. With just a bit of extra work and the fear of IRS audit gone, you’ll be on your way to better financial flexibility.
Have you maximized your work from home tax deductions? Share your experience in the comments below!