Tax Tips For The Self-Employed Who Work At Home: What You Can Deduct & What You Can’t

by Andrea

office items, taxes

money-issues-for-home-and-work-by-svilen001.jpg Whether you work at home running your own home-based business or you telecommute as part of your job for another employer, you should know that there are certain tax deductions that you can take.  (And some that you can’t.)

In fact, some people avoid taking home business deductions so as not to signal a tax audit.  However, if you follow the rules, then you will have no reason to worry.

For starters, check out these 12 Tax Deductions For Your Home Business.


What You Can Deduct

You may deduct the cost of anything that you use exclusively for business.  This could be your computer, printer, stationery and/or any other equipment in your home office.  What if you use that equipment for personal use sometimes?

Here’s what the IRS says:

Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.

You can deduct the cost of using part of your home for business.  The IRS stipulates that you can deduct home use if:

  • It meets the rules of exclusivity, meaning you use that part of your home for business only and not for personal use.
  • It meets the rules of regular use, meaning you use the area for business regularly and not just have it set up for business.

The following rules will also help to prove that you are eligible for a home use deduction:

  • If the area of your home is your principal place of business then you can deduct the cost of using it.
  • If the area of your home is, a place where you meet patients, clients, or customers you may deduct the cost of that space.
  • If the area of your home is a separate structure from your house, you can feel comfortable claiming it for your home business.


Determining How Much To Deduct

To determine how much you can deduct for business use of your home, you need to calculate the percentage of your home that you use for business purposes, and then deduct that percentage of your expenses.  (See how to calculate it.)

If you telecommute, meaning you work at home for an employer, then you may want to ask your boss to write a letter to help prove that you are eligible for a home use tax deduction.

Here’s an example of a New Jersey man who worked exclusively from home.  But, since his New York employer was able and willing to provide him with office space if he needed it, it was ruled that he worked at home for his convenience, and he was forced to pay non-resident New York state taxes.

So, if you work from home, you may want to get a letter from your employer stating that you work at home for the company’s convenience.


What You Cannot Deduct

If your home office or business supplies do not meet the exclusivity and regular use laws, you should not try to deduct them.

If you can complete your work somewhere other than at home, then you cannot use that space for a home business deduction.

A few years ago, the IRS broadened the business activities that can be considered in determining whether a home office is a taxpayer’s principal place of business. Now, if a home office is used exclusively and regularly for the administrative or management activities of your business, it also qualifies. Source (But this only applies if your home office is the only place you can perform these tasks.)

You may not deduct use of hobby space, even if it is profitable.  It must be a registered business.

The IRS has a number of helpful articles about home office deductions: