The home office deduction can be a lucrative tax savings plan that ensures you aren’t leaving any money on the table during tax season. If you use a room in your home for business, this deduction can bring additional savings to your tax savings plan. However, there are a few key parts to implementing this deduction correctly. From proper documentation, to qualifications, to which method is better—there is a lot to consider when you and your tax strategist decide to utilize this deduction.
One major misunderstanding when it comes to home office deductions is that this benefit can bring a red flag on your taxes to the IRS, increasing your risk of being audited. While the IRS does not publish its audit red flags and instead keeps them confidential, there is no indicator from tax strategists that the home office deduction correlates with an IRS red flag. Allowing the red flag myth to steer you away from the benefits of this deduction could be costing you money when you file your taxes.
The home office deduction is not a new benefit for professionals to utilize. It first came to the IRC over 20 years ago in 1999 and is an extremely credible benefit to tax strategists everywhere. This deduction can help ensure you are maximizing your savings and not leaving money on the table.
If you’re considering utilizing the home office deduction, you’ll want to work with your tax strategist to see if you qualify. The most important way to verify if your home office qualifies is if you use a part of your home exclusively for business and on a regular basis.
In addition to using your home office exclusively and regularly to qualify, you must meet one of the requirements below:
While “regular” use may seem like a challenge, all it means is that you utilize the space on a routine basis. For example, if you’re using a dedicated office space every Friday to handle administrative work or take client meetings, you would qualify for home office deductions since the office is being used on a regular basis.
There are two kinds of home office deductions that you and your tax strategist can consider for your filing: Standard and Simplified. Both maximize your tax savings but require different amounts of effort throughout the tax year.
Standard Home Office Deduction: In this method, you’re able to deduct 100% of many of your home office expenses. This deduction requires extensive documentation and record keeping.
With this method, you can also deduct a portion of your house expenses based on the square footage area of the part of your home that you use as a home office. For example, if your home office is fifteen percent of the square footage of your house, you can deduct 15% of the cost of your mortgage interest or rent, electric bills, water bills, trash collection, gas bills, and even your homeowners insurance. You are also able to deduct 15% of other whole-house expenses, such as exterminator fees.
Simplified Home Office Deduction: A relatively new method for deducting your home office, the simplified method wasn’t usable until 2014. When implementing this method, you can deduct $5 per square foot of your home office, up to 300 square feet, for a maximum deduction of $1,500. This deduction is in lieu of keeping documentation of all of your homely expenses, which may “simplify” your overall home office deduction when filing.
Either home office deduction option you take can be incredibly beneficial to your tax savings plan. Strategize with your tax professional early on to ensure that you have everything established and ready for filing. Curious about how much you could save with your home office? Check out our Tax Savings Calculator to get a head start on your tax savings plan.
One of the most critical steps to maximizing your home office deduction is to document as much as possible. Not only is this beneficial to your tax professional who will need this documentation for filing, but it’s a great way to ensure your deductions are safe if you are ever audited. Be sure to work with your tax strategist early on in your tax savings plan to ensure that your documents are lined up with exactly what they need from you to maximize your savings with the home office deduction benefit.
We also recommend using an accountable reimbursement plan to account for the expenses. This plan allows you to submit expenses related to the maintenance of a home office for reimbursement. Not only is this a huge benefit, but it will help you easily keep track of all your home expenses.
Bottom Line: If you allow the red flag myth to prevent you from utilizing the home office deduction, then you could be leaving thousands of dollars unclaimed at tax time. Give us a call at TSP Family Office so our tax strategists can help you make the most out of your home office.