Working from home comes with many amazing freedoms, no commute…and complicated tax forms. However, understanding what home office expenses can be deducted from your taxes can lead to big benefits.
Charitax founder, CPA and former federal auditor, Eric Bisignano, outlines two basic rules to follow when it comes to calculating home office deductions on your taxes.
1. Everything must be defensible.
2. Don’t estimate. Use exact numbers.
While many believe a home office raises a red flag on your taxes, Bisignano says there is nothing to be afraid of if you’ve kept good records.
“You’re going to be the most successful defending yourself if you can give as much detail as possible,” he says. The best thing to do is save receipts and utility bills and track them through programs like Quickbooks or Excel to provide defensible proof of your expenses for deductions.
“The more detailed, the better,” he reiterates.
Bisignano says there are two main things that you should not estimate – your expenses and the square footage of your office space. Use exact amounts, as a slew of even-numbered deductions can raise a red flag, and physically measure the size of your office.
What defines a home office?
According to the IRS, a home office must be 100 percent dedicated to business use. The ideal situation is the spare bedroom office where the room is clearly dedicated to business purposes. While this scenario is preferable, the door is open for other types of spaces.
“If you have an open floor plan it doesn’t preclude you from having a home office,” Bisignano says. There are no specifications about what an office has to look like. He recommends drawing an imaginary line and measuring off a corner of a room to designate as your office, but being reasonable in whatever space you claim. Avoid scenarios where you count all of an open living space as your office. For example, if you live in a 700 square-foot apartment, it is not recommended to just subtract the bedroom, bathroom and kitchen and call the rest your office.
Storage space can also count towards the square footage of a home office so include any work-use closets or other storage areas in your total.
“A home office is where you work and where you store work,” Bisignano says.
What does a home office mean for my taxes?
A home office has many benefits – convenience, comfort, no commute, low overhead – but one of the biggest advantages is the tax benefits. Taxes are calculated on income minus expenses and home office deductions help lower taxable income.
It’s difficult to measure the exact benefit of claiming a home office as the final numbers depend on many factors including your marginal tax rate, how much money your business is making, your family situation and whether you rent or own your home. However when it comes to a home office, it’s money you are already spending, so Bisignano points out, why not deduct what you are able?
Tax form 8829 – Expenses for Business Use of Your Home – itemizes home office expenses. The form asks for the total square footage of your home and the total square footage of your office (which is why it is important to measure) to find the percentage of your home that is your office. If you rent, that percentage of your rent and all your utilities – sewer, water, gas, electric – can be deducted.
Two utilities are absent from this list – phone and internet. If you have a separate phone line or fax line for your business, 100 percent of that line can be deducted. Bisignano urges home office owners to consider what percentage of an expense they are using for their business.
Because he uses them at a higher rate than what his home office would be, “As a separate business expense I claim my phone and my internet,” Bisignano says. He provides an example that a person may estimate they use their phone for business 90 percent of the time, so they can deduct 90 percent of their monthly phone bill.
When it comes to home offices, renting and owning are not created equal. Owners don’t use their mortgage payment, but instead have to enter mortgage interest, property taxes and property mortgage insurance if applicable. The home-office percentage of that number will be the homeowner’s deduction.
Not only can the space of a home office be deducted, but all direct expenses to your office. These are the items that it takes to set up an office – a desk, chair, rug, office supplies, etc. Bisignano says decor can be a bit of a gray area, as in did you really need that piece of $1,000 art for your office, and recommends being conservative in those deductions.
“Any improvements you do to your home office are deductible as well,” he points out. This covers things like new paint or carpet, with the caveat of only counting a percentage of the costs if your office is in an open space.
Bisignano describes himself a bit differently than your typical accountant. “I tend to get creative people a little bit more than your average suit and tie accountant,” he says. His operation functions a bit differently too. A portion of every invoice at Charitax goes to a chosen non-profit cause. He left his position as a federal auditor to pursue Charitax full-time, giving him the ability to look at every return through the eyes of an auditor.
Charitax’s client base is largely self-employed creatives like writers, bloggers, musicians and graphic designers.
“Most of my entire client base has a home office,” he says.
All that Bisignano does derives from his love of helping others, from charities to his clients.
“It’s cool for me to be able to help with the part of the business that everybody generally hates,” he says.
Photo by Anne Evans.