David Fraser, an accountant with LB&A Certified Public Accountants in Matthews, recently addressed questions from Shop Talk correspondent Marty Minchin about who qualifies for the home office deduction.
While working from home has become a viable option for many small-business employees and owners, specific guidelines from the IRS limit the type of home offices that are eligible for tax deductions.
The home office deduction was designed for people who run a business from their house or whose employer doesn’t maintain an office for them.
“It basically allows a person who has a home office to deduct a portion of their home-related expenses from their business income,” Fraser said.
Three factors need to be considered when determining whether a home office is eligible for the deduction:
• The space is used regularly and exclusively for the business.
• The space is used for meeting with clients during the course of business.
• A separate structure not connected to the house is used for business purposes.
According to these definitions, writing business emails on a laptop on the dining table doesn’t qualify. Setting up a card table in the corner of the dining room for a business laptop and administrative work does.
Fraser said that while the definitions of eligible home office space aren’t always clear, he tells his clients that if they have an office somewhere else, they probably don’t qualify. That includes employees who sometimes choose to work from home but also have an office provided by their employer.
Business people such as landscapers or traveling salespeople, who conduct most of their business outside the house but do some administrative work from home are eligible for the deduction. Fraser recommends setting up a separate area of the house for business tasks.
Fraser said that documentation does not need to be sent with tax returns, but business people should save documentation in case of an IRS audit.
Keep track of eligible deductions, including home repairs, utility bills, security system costs and phone bills. Under the current IRS rules, employees can deduct a percentage of those bills and expenses equivalent to the percentage of their home that is used for an office.
Fraser recommends that small businesses with home offices set up separate bank accounts and credit cards for their business to better track their expenses. “That will help you at the end of the year,” he said.