Some tax practitioners feel that it is better not to claim a deduction for an office in the home. There are several reasons for this thinking. A home office deduction, under certain circumstances, can invite more scrutiny to your tax return. This is especially true if you are an employee claiming the expense on form 2106 Employee Business Expenses.
The home office deduction also generally involves depreciation of a portion of your home. This depreciation will have to be recaptured when you sell your home. Normally the entire gain from the sale of your home will be excluded from tax if you have met the time requirements. However, if you have claimed any depreciation in prior years you will have to report it as income in the year of sale and pay tax on it.
Another reason that tax preparers may overlook the home office deduction is that much of the expense is already deductible on schedule A under the mortgage interest and property tax headings. Because of this, there may be a feeling that the only thing gained is a small percentage of the utilities and of course that depreciation that you will eventually recapture.
Now that we have listed some of the seemingly negative side of the home office deduction it's time to take a look at the benefits. Yes, its true that the mortgage interest and property taxes are already being deducted on Schedule A; however, if you can shift that deduction from an itemized deduction that only offsets your regular income tax to a business deduction that offsets both regular income taxes and self employment tax you will be ahead of the game by 15.3%. That is the tax rate that self employed individuals pay for Social Security and Medicare taxes.
Renters really benefit from this deduction. Through the home office deduction, qualified taxpayers are able to turn a percentage of an otherwise non deductible expense - rent and utilities- into a tax deduction!
One really important benefit arising from the home office deduction is the impact it has on business auto deductions. If you have a qualified home office that first business trip away from the home in the morning is deductible business mileage. Where no home office exists, that first trip is non deductible commuting!
As to that issue of recapturing the depreciation, the IRS has implemented a new simplified home office deduction method that eliminates the depreciation component of this deduction. Under this method a qualified taxpayer can take a deduction of $5 per square foot not to exceed 300 square feet. (You can read more about this in future posts).
Each individual must weigh the facts and the risks for themselves but on the whole, if you are entitled to a deduction and have positive business income to offset this can be a very valuable deduction and should not be overlooked.
The home office deduction also generally involves depreciation of a portion of your home. This depreciation will have to be recaptured when you sell your home. Normally the entire gain from the sale of your home will be excluded from tax if you have met the time requirements. However, if you have claimed any depreciation in prior years you will have to report it as income in the year of sale and pay tax on it.
Another reason that tax preparers may overlook the home office deduction is that much of the expense is already deductible on schedule A under the mortgage interest and property tax headings. Because of this, there may be a feeling that the only thing gained is a small percentage of the utilities and of course that depreciation that you will eventually recapture.
Now that we have listed some of the seemingly negative side of the home office deduction it's time to take a look at the benefits. Yes, its true that the mortgage interest and property taxes are already being deducted on Schedule A; however, if you can shift that deduction from an itemized deduction that only offsets your regular income tax to a business deduction that offsets both regular income taxes and self employment tax you will be ahead of the game by 15.3%. That is the tax rate that self employed individuals pay for Social Security and Medicare taxes.
Renters really benefit from this deduction. Through the home office deduction, qualified taxpayers are able to turn a percentage of an otherwise non deductible expense - rent and utilities- into a tax deduction!
One really important benefit arising from the home office deduction is the impact it has on business auto deductions. If you have a qualified home office that first business trip away from the home in the morning is deductible business mileage. Where no home office exists, that first trip is non deductible commuting!
As to that issue of recapturing the depreciation, the IRS has implemented a new simplified home office deduction method that eliminates the depreciation component of this deduction. Under this method a qualified taxpayer can take a deduction of $5 per square foot not to exceed 300 square feet. (You can read more about this in future posts).
Each individual must weigh the facts and the risks for themselves but on the whole, if you are entitled to a deduction and have positive business income to offset this can be a very valuable deduction and should not be overlooked.
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