Your home may be your castle, but nowadays – with technology, the Internet, and the price of gas – more people are discovering that their house is also company headquarters. More than ever, the entrepreneurial spirit is taking over with new businesses cropping up every day. Then, there are those that are tired of the commute and have convinced their boss that telecommuting is a good idea.
Turning part of your home into an office has a number of benefits besides the number of casual days and short distance from your bedroom to your place of work. Uncle Sam has decided that home offices can qualify for a number of tax deductions that can save you money and squeeze more investment out of your home. And remember that the definition of home for this purpose can include a single-family residence, condo, apartment, and a boat (thanks to technology, a floating office is possible!). Before you start counting your pool and lounge chair as part of your office’s square footage, it is important to understand that there are a number of stringent government regulations for these fringe benefits.
Rules, Rules, and More Rules Require Records
There is one catch: you will need to document everything about having a home office in order to collect on the tax deductions. Detailed records will help you ensure you have everything in place since the tax man has started scrutinizing people who claim these deductions after so much fraud.
In order to qualify for a home office, you will have to prove that you use part of your primary residence regularly and exclusively for work purposes, such as meeting and interacting with patients, clients and customers. The term, exclusive, means that you cannot use that area you are claiming for business deductions for any personal matters. For instance, this includes not sending personal emails from your office space (even if you did this all the time from your work cubicle!). The only types of businesses in which the personal and professional do not have to be separated are daycare providers or companies that store business inventory or product samples.
Proving this to the tax man is fairly easy if you work in an acknowledged home-based career, such as a freelance writer or graphic artist, computer programmer, or telemarketer. The fact that you can conduct administrative and management tasks and be considered exclusive helps other types of home-based businesses that do not conduct all their work from home, including service workers, such as gardeners, swimming pool techs, plumbers, salespeople, and contractors.
Telecommuters have the most challenging requirements for qualifying for home office deductions. They must prove that this arrangement is for the employer’s convenience and the space must be used continually for business. According to the IRS, there can be absolutely no personal or professional mix in this type of situation. If you no longer keep a cubicle at company headquarters and only occasionally come into the office for meetings, then you can easily qualify for these deductions. Additionally, you will be able to deduct any commuting expense as well that are not reimbursed by your boss.
Keeping Tabs of the Deductions
According to the Internal Revenue Service website’s Home Office Deduction tips, there are a number of expenses that you are allowed to deduct for using part of your home for business purposes:
- Real estate taxes
- Mortgage interest
- Association fees
- Rent (if you do not own the home)
- Telephone and utilities
- Security monitoring
- Trash service
- Painting and repairs
The amount of deductions is tied to the square footage of your home that is used to conduct business. In calculating this square footage, you are allowed to include all areas that are used for business, including a room, a bathroom, and storage space even if it is detached from the structure, such as a guest house or storage shed.
Compiling the Paperwork
As with any business, you want to make sure you keep a handle on all the expenses that you can use towards deductions. After all, being self-employed leaves you open to greater taxation in the form of self-employment tax rather than having your federal and state tax removed from each paycheck. Working as an independent contractor is great when you get the checks, but you have to remember that Uncle Sam will be calling for a slice of that money pie come tax season.
Many business owners try to convince themselves that they can really spend a couple weeks before the tax deadline finding all the previous year’s worth of receipts or they can just guess at the total amount of expenses for each deduction category. This is time-consuming; it can lead to missed deductions; and it can be an invitation for an audit since home-based offices tend to be scrutinized more than other companies.
Become Environmentally Savvy: Make the Switch to Online Record-Keeping
Making the decision to keep detailed records is the first step. The next one is to stop using paper files. Without expounding on just the environmental benefits of shrinking your carbon footprint, you will not worry about misplacing any receipts or forgetting what you purchased. Your accountant probably does not like receiving piles of paper either. This type of file system also leaves you vulnerable to identity theft or other data compromising situations, such as a fire or other natural disaster destroying the only records you have about your business.
Computer files are a step in the right direction toward keeping up with what technology has to offer. While these can be more easily updated and reduce the amount of paper, even this record-keeping system can lead to similar data integrity or privacy issues.
Ownersite Technologies offers an online log where you can record all your expenses related to your home office as well as maintain other information about your home in terms of inventory and maintenance.
The File Manager supports DOC, XLS, PDF, and TXT files. Images, such as digital photos of all the properties, can be stored in the Photo Album or Inventory section of the Web portal. The confidentiality of this sensitive information is protected because all of your files are stored on Ownersite Technologies’ database and not the file system. This means that the files cannot be accessed or viewed when not logged into the application.
Whatever you decide to do, it is best to consult with a tax professional because the deductions and restrictions can be very confusing. Having an online record of all expenses can put a big smile on your accountant’s face as well as ease the difficulty of your annual tax preparation service and minimize what you have to fork over to the tax man!