Save Taxes by Taking the Home Office Deduction

The IRS allows business owners and employees to deduct expenses for using part of their home for business purposes. This can help to save income taxes as well as self-employment taxes. For every $1,000 of additional deductions, a self-employed person may save around $500! Here are the rules:

The first rule is that the area you use for business must be used exclusively and regularly for business. This means that the guest room that you use as an office cannot be used for even a single night to host your guests.

The second is that your home must be your principal place of business. To determine if your home is your principal place of business you must use it for administrative or management activities such as billing customers and recordkeeping.

If you are an employee there are other criteria that must be met as well. You must use your home for the convenience of your employer and you must not rent any part of your home to your employer.

What can be deducted exactly? You can deduct items such as mortgage interest, property taxes, insurance, utilities, repairs and maintenance, and depreciation of your house. Even if you itemize and deduct mortgage interest and property taxes on your tax return, it is more advantageous to someone who is self-employed to deduct a portion of these expenses as business expenses. The reason is to save self-employment taxes.

Although some believe the home office deduction will increase your chance of an audit, this should not discourage taxpayers from taking this valuable deduction. As long as you follow the rules and keep good records, you should not be concerned. Keeping good records and adhering to the rules applies to all other deductions as well.