Q: Does my small business qualify for the home office tax deduction?
While working from home has become a viable option for many small business employees and owners, specific guidelines from the IRS limit the type of home office setups that are eligible for tax deductions.
David Fraser, an accountant with LB&A Certified Public Accountants in Matthews, recently addressed questions about who qualifies for the home office deduction and how the home office deduction rules will change for tax forms filed in 2014.
The home office deduction was designed for people who run a business from their house or for whose employer doesn’t maintain an office for them.
“It basically allows a person who has a home office to deduct a portion of their home-related expenses from their business income,” Fraser said.
Three factors need to be considered when determining whether a home office is eligible for the deduction:
• The space is used regularly and exclusively for the business
• The space is used for meeting with clients during the course of business
• A separate structure not connected to the house that is used for business purposes.
According to these definitions, writing business emails on a laptop on the dining table doesn’t qualify. Setting up a card table in the corner of the dining room for a business laptop and administrative work does.
Fraser said that while the definitions of eligible home office space aren’t always clear, he tells his clients that if they have an office somewhere else they probably don’t qualify. That includes employees whose businesses have an office set up for them but who sometimes chooses to work from home.
Business people such as landscapers or traveling salespeople, who conduct most of their business outside the house but still may do some administrative work from home, are eligible for the deduction. Fraser recommends setting up a separate area of the house for their business tasks.
Fraser said that no documentation for a home office needs to be sent with tax returns, but business people should save documentation in case the IRS audits them.
That means keeps track of and eligible deductions, including home repairs, utility bills, security system costs and phone bills. Under the current IRS rules, employees can deduct a percentage of those bills and expenses equivalent to the percentage of their home that is used for an office.
Fraser recommends that small businesses with home offices set up separate bank accounts and credit cards for their business to better track their expenses. “That will help you at the end of the year,” he said.
The IRS is proposing changes to the home office deduction for tax forms filed in 2014 that would simplify the process, which now involves filling out a 43-line form and calculating deductions and expenses.
The new rules will allow employees and business owners to compute their deductions based on $5 per square foot up to 300 square feet. The deduction would be capped at $1,500.
According to recent statistics available from the IRS, 3.4 million taxpayers applied for the home office deduction in 2010. IRS officials hope the simpler formula will cut down on paperwork for small businesses and increase the number of applicants for the home office deduction.
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