Important Advice If You Take A Home Office Deduction On Form 8829
Noted as one of the top areas that the IRS examines in personal tax returns, the home office deduction claimed on the IRS Form 8829, Expenses for Business Use of Your Home is both a valuable benefit and a dangerous bane for small business owners and those who regularly work from home. Designed to acknowledge that the home office can frequently be a place where income is earned, particularly now in the age of the Internet and its reach, the home office deduction continues to be an area that the IRS sees as ripe for abuse. However, that shouldn’t be a reason to leave valuable deductions on the table when one has a valid claim for the related tax savings.
Fork in the Road
Recent changes have now given tax filers two ways to claim the home office deduction. The first is the traditional method where the filer collects all of his or her expense information and then calculates the related deduction. This is often the higher value approach of the two methods, but it also retains the original risk of audit by the IRS.
The second version is a new choice just recently made available in the last two years, the “simplified method” home office tax deduction. It provides a lower value deduction, but with a few bits of information the deduction is treated as a standard savings and has a far lower risk of review. This approach is particularly valuable for those who run an office at home but may not meet every requirement perfectly.
Key Factors to Meet To Claim A Home Office Deduction On IRS Form 8829
The home office deduction has specific criteria that need to be met by a filer and can be easily proven when claiming the deduction on Form 8829. These range from activity to purpose or function of the room in the home to expense documentation.
First, the home office must be for the exclusive use of the work or business being performed. That means that office can’t be shared with family use of any kind.
Second, the use of the room has to be regular in nature. One of the best ways to prove this is to maintain a log of work activity that was performed in the office daily. Google calendar is a great, free way of doing this as well as other calendar software, just highlighting the hours of the day worked and then printing out the report at the end of the month or year for documentation.
Third, the room has to be a place where you regularly meet clients or customers or perform your work. With the Internet being the main conduit for many, there ought to be a viable computer workstation with a proven Internet connection in the room or near a Wi-Fi router.
Fourth, separate structures are allowed if they are part of the same property. This could be a garage, in-law or backyard studio for example.
Financial Differences For The Two Methods
The simplified method provides a filer a flat rate of $5 per square foot of the allowable room space, maxed at 300 square feet. The criteria is the same as the traditional method but it involves less paperwork explaining expenses.
The traditional method allows for more expenses, but each one has to be documented in the tax year, and shared expenses have to be prorated. So, for example, you have a house alarm expense, you would need to pro rate the home office to the total space of the home. So 150 square foot room in a 2,600 square foot home would be 5.7 percent. So 5.7 percent of the alarm expenses could be attributed to the home office as a valid expense.
To document expenses correctly, self-employed and small business owners need to use IRS Form 8829 to calculate their deduction. The deduction is then applied on the Schedule C.
Keep in mind a filer’s gross income can limit expenses claimed. If the income earned from a home business, for example, reports a loss, then the home office deduction will be reduced as well. Further, employees of companies claiming a home office have additional criteria that need to be met. One example is that the home office is also available for the employer’s use as well, not just the employee. In these situations, the relevant deduction is claimed on a file’s Schedule A, Itemized Deductions.
Don’t File The Form 8829 On Your Own
Just reading through IRS Publication 587, Business Use of Your Home, one can see how complicated preparing a home office deduction can really be, even when one uses tax software as a guide. And a big tax mistake found two years later by the IRS is not the sort of problem a small business needs getting started. Tax Samaritan can help. As Enrolled Agents, we are well versed on the home office deduction requirements and the simplified method benefits. We can guide your tax return preparation, significantly reducing the risk of an IRS audit due to filing mistakes.
Don’t take a chance that could ruin your small business and more. File with expert help and put your attention on growing your business instead.
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Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.
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