How to Claim Home Office Deductions. New rules were instituted in 1999 for claiming an office-in-home deduction on your tax return. If you couldn't deduct these expenses under the old tax law, you may be able to do so now.
Qualifying for the Home Office Deduction
Determine if your home office is used exclusively and regularly to manage or administer your business. Make sure you have no other fixed location where you do the major managerial or administrative work.
Verify that your home office is also used for the convenience of your employer if you are an employee rather than an independent contractor or sole proprietor.
Calculating the Deduction
Use IRS Form 8829 if you are self-employed or Federal Worksheet 51A if you are an employee.
Take the square footage of your office and divide it by the square footage of your entire home to obtain the percentage of the costs you can claim.
Keep records of utilities, mortgage interest, real estate taxes, rent, insurance, trash removal and security service payments that you made during the year.
Include gas and electricity bills. Use water costs only in the rare case that you use water in your business.
Save bills for repairs and maintenance of the office or entire home.
If you own or are buying your home, calculate your investment in the home - the purchase price and costs plus improvement expenses - and then find out the market value of your home at the time you converted your space into a home office. You need this information, because you are required to depreciate the office.
Follow the instructions on Form 8829 or the worksheet to calculate the deduction.
Recording the Deductions
If you are self-employed, transfer the deduction to Schedule C.
If you are an employee, transfer the deduction first to line 4 of Form 2106, if you are using it, or directly to the miscellaneous deductions section of Schedule A.
Expenses for telephone service, furnishings and equipment are not part of the office-in-the-home deduction, but are entered on Schedule C if you are self-employed and on Schedule A if you are an employee. You may not be able to deduct all your expenses in the current year. If that is the case, the remainder will be carried forward to another tax year. Renters receive direct benefits from the office-in-the-home deduction. Your home office does not have to be a complete room; it can be a specific, demarcated area.
Home office deductions have been a red flag for IRS audits. Be sure your claim is legitimate by carefully studying how your facts and circumstances fit in with regulations. Depreciation, which must be taken by homeowners, has a tax consequence when selling the home. An employee's standard deduction may be greater than the total Schedule A itemized deductions. However, do the paperwork to determine which is more advantageous.