Can I deduct my home office?

Jane Bryant Quinn
by Jane Bryant Quinn, Dimespring Contributor  (@janebryantquinn)

Yes, if you play it right. Some 4.6 million small businesses are based at home, according to the Small Business Administration, yet only about 3.4 million of these taxpayers are writing off their costs. Some of you are leaving money on the table.

You home office is deductible if it meets two tests:
1. The space is your principal place of business, where you meet clients, handle orders and do the paperwork. You can meet clients elsewhere, too, as long as you run your business out of this office.
2. You use the space exclusively for business. It can’t switch to being a TV room, or exercise room or spare bedroom for guests. Personal use of this space will kill the tax deduction. So put the TV and the treadmill somewhere else.

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A deductible office doesn’t have to be a full room. It can be just part of a room, as long as it’s clearly marked off as a sacred business space.

How much can you write off? That depends on the size of the office compared with the size of your house. For example, if you’re using 10 percent of your home for business, you can write off 10 percent of such things as rent or mortgage interest, real estate taxes, homeowners insurance, utilities, cleaning expenses and an alarm system.

You can also depreciate the business section of your home.

There is a limit. Your home-office write-off can’t exceed your gross income from the business. To see if you qualify, you first have to write off your rent or mortgage interest, real estate taxes and the direct expenses of the business, such as telephone, Internet expenses and supplies. If all these expenses amount to less than your gross business income, you can start writing off your business’s share of the home maintenance expenses, including utilities, insurance, a security system and cleaning bills.

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Some small business owners skip the home-office deduction rather than wrestle with the complicated Form 8829, which you need to fill in and attach to your return.

For tax-year 2013, however, the IRS is going to make things easier. You’ll be able to take a flat write-off for home-office expenses, instead of doing all the arithmetic. That’s especially good for people with small home offices and an aversion to paperwork.

If you’re worried that a home-office deduction might flag your return for an audit, don’t. The IRS has other fish to fry. You’ll be OK, as long as the deductions are fair.

There are too many special provisions for home-based businesses for me to cover everything. For example, daycare centers have special rules. You’ll find all the angles deducting your home office here, in Publication 587.

The big picture is that there’s money in the tax code for home-based entrepreneurs, and you should get your piece.