One of the best deductions for self-employed people who work from home is the home office tax deduction. Basically, you take the square footage of your home office and compare it to the total square footage of your home, and then you get to deduct a similar percentage of certain house expenses as a business deduction. It’s one of the ways to take a little bit of the sting out of self-employment taxes.
How To Claim Home Office Deduction
Like most self-employed small business tax deductions, you take the home office tax deduction on Schedule C. You’ll need Form 8829 Expenses for Business Use of Your Home to calculate and file your deduction. If you use tax prep software like TurboTax, it will do this for you. (You’ll need one of the small business editions to take this deduction, but it’s most likely going to save you a lot more money than you pay for a more expensive version of TurboTax.)
To qualify for the home office deduction, you have to use a specific area of your home exclusively, and on a regular basis. In other words, it has to actually be your office where you do your work for the business, and it can’t also be something else. So, if your home office is also where the kids do homework, or where you setup your model trains, then it can’t be a home office.
This last bit gets people all riled up sometimes. There are near urban-legend level stories of people’s home office deduction being disallowed because there was a teddy bear on the floor, or a rocking horse in the corner.
While it is true that your home office must be used exclusively for business, and that you never want to commit fraud by lying on your taxes, it is also true that there is no super-secret IRS home office spy unit either. In other words, if your kiddo wanders in to see what Daddy is doing on the computer and leaves his teddy bear behind, you can still claim the home office deduction without worrying about the bear.
For some folks, the IRS has taken on a near-mythical reputation on par with Santa Claus. In reality, the IRS has no idea what happens inside of your home. An IRS agent can end up in your home, looking at your home office, in exactly the same way as a police officer, by your invitation, or with a warrant. There are no home office surprise inspections that will catch the forgotten bear and disallow your home office tax deduction.
The IRS may, however, ask for proof, or other documentation about your home office, just like they can for any other part of your taxes. If you need to send in a photograph, or otherwise document your office, do make sure the bear gets picked up and returned to its owner, before taking the picture. And look closely at the photo before submitting it, to make sure nothing else looks like it doesn’t’ belong.