As job prospects become more scarce in today’s flagging economy,
more entrepreneurial workers have turned contractor or started new
businesses in their homes. Some even have become independent
consultants for the very companies that laid them off.
Turning the lemon of unemployment into the lemonade of becoming
your own at-home boss is no nap on the couch. But as April 15
approaches, there are a number of tax advantages that may be even
more appealing than creating a spreadsheet in your slippers.
“There’s an awful lot more people working from home than in the
past,” said Brenda Sherman, president of Integrity Accounting and
Tax Services in Littleton. “And the IRS has not been as wishy-washy
about the home-office deduction lately. For years, the common
taxpayer was confused. Whereas now, the rules have been in place
for three or four years and it’s a little more easy to
understand.”
A home office is eligible for a slew of potential write-offs —
but only if the workspace is used regularly and exclusively for
business-related activities. That means no pool table or television
in the home office, unless your “business” is professional pool
player and TV critic.
“When I first started my business and I was working from home,
my bookcase in my office had all these books about how to repair
plumbing and lay a hardwood floor,” said Sherman, a certified
public accountant. “If the IRS were to come in and audit, they
could have said that room was not used exclusively for
business.”
Those with qualifying home offices cannot only deduct the cost
of their office equipment and furniture, but can also deduct a
percentage of such expenses as homeowner’s insurance, utilities, a
new water heater or furnace, home repairs, security systems, snow
removal, lawn care and more.
The larger the home office space, the greater deduction a
home-based entrepreneur can take on what would otherwise be
nondeductible homeowner expenses. For example, if your office
constitutes 10 percent of your home space, you can deduct 10
percent of those “indirect” expenses.
When one paints, puts in new carpet or otherwise refurbishes a
home office, that cost is a “direct expense” and is entirely
deductible.
There are a number of other potential tax advantages for
home-based workers, especially those who are willing to keep a
copious record of their daily activities. If you leave your home to
go to the office-supply store or meet a client, the mileage is
deductible..
The accountant is quick to offer this caveat, however: Schedule
C used by home-based contractors to document deductions is among
the tax forms that are most routinely audited by the IRS. And while
there is some gray area in the rules for home work spaces, many of
the lines are clearly drawn, according to Sherman.
“For instance, I had a client who said their whole house was a
business purpose,” she recalled. “I said, ‘I’m sorry, but I’m not
going to be the one signing your return. Where do you eat? Do you
sleep at night?’ Where do you do that?’”
Home entrepreneurs also need to be careful about deducting their
computer and cell phone expenses because such items often are used
for both professional and personal purposes.
“I can pretty much guess that any child in elementary school is
having to come home and use the computer,” Sherman said.
It is not just self-starting entrepreneurs who can take
home-office deductions. Employees who routinely work out of their
homes may also in some situations be able to make similar, if more
limited, deductions if their expenses are greater than 2 percent of
their adjusted gross income and they are working in their homes at
the convenience of their employer.
“There’s an awful lot morepeople working from homethan in the
past.”
Brenda Sherman, president of Integrity Accounting and Tax
Services
