Guidance on Home Office Deductions from The Illinois CPA Society
CHICAGO, July 14, 2016 – Knowing all the advantages that qualifying home business owners can leverage when preparing tax returns can make a big difference in whether to expect a government refund check… or a tax bill. The Illinois CPA Society outlines key points that can help home-based business owners save some vital cash – if a little homework is done in advance.
The general tax rule to claim a home office deduction is that some portion of your home must be used exclusively and regularly as the principal place of business. “Exclusively” means business only, and an area (such as a kitchen) that is used both for business and personal use doesn’t qualify. “Regularly” means on a regular basis and not just used some of the time for business.
Calculating the Home Office Deduction
In 2013, the IRS introduced a new method for calculating deductions for those who work from an office within their home and are self-employed. The calculation, known as the simplified option, is based on the size of a home office and works like this:
- Those who qualify can take a standard deduction of $5 per square foot of workspace used in a home office, with a maximum of 300 square feet.
Simplified Option Example: If a den, basement or other designated home office space is measured at 17x16 feet (272 total square feet) you would multiply the total square footage by $5 (5 x 272) to figure a home office deduction amount of $1,360.
- Easier to calculate than previous way of adding up all home office-related expenses to determine how they may apply – better known as the regular method.
- When using the simplified option, taxpayers do not need to complete or attach Form 8829 with a return.
- Taxpayers may still choose either calculation to figure out their largest deduction available. One or the other, but not both.
- The calculation you choose can also change from year-to-year, enabling filers to choose the simplified option or the regular method.
Other Home Business-related Deductions
Internet access & utility bills – Portions of heating, electrical and other utility bills can be deducted as home-based business expenses. Phone, internet and other information access service expenses may also qualify for deductions – based on the portion of the service that applies to business rather than personal use. Separate internet connections or phone numbers may make it easier to track business-only expenses.
Office supplies – All qualifying expenses for items needed to run a home-based business, such as computers, printers, ink, paper and other office supplies may be deducted.
Business travel expenses – Home-business entrepreneurs who drive to meet with clients or fly to business-related conferences and events may claim the costs involved as tax deductions. However, keeping receipts and documentation of each expense is critical in case anything comes into question.
For those who use their car for business, expenses such as parking, tolls and current standard mileage deductions may apply. The most recent standard mileage rates are:
- 54 cents per mile for business-related travel
- 19 cents per mile for medical or moving purposes
- 14 cents per mile for driving to benefit a charitable organization
Other financial expenses that home-based business owners may be eligible to deduct include furniture and other upgrades to their home offices and health insurance coverage for themselves and their families.
Home business owners should retain expense/tax deduction records for at least three years after filing their tax returns or two years after taxes were paid, whichever is later. Cancelled checks, bank statements, vendor invoices, bills, receipts, and mileage logs can be used as home business tax records. More information on business use of a home is provided in IRS publication 587, which is available at this web link.
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About the Illinois CPA Society
The Illinois CPA Society, with more than 24,000 members, is one of the largest state CPA societies in the nation. Our mission is dedicated to enhancing the value of the CPA profession through the strategic initiatives of advocacy, information, education and connections.