In 1999, Congress awarded a tax break to those of us who work out of our home. You are now entitled to claim a home deduction if your home office is used to conduct administrative or managerial activities provided there is no other location where you may conduct these types of activities. You are no longer required to meet with customers or use your home office as a principal place of business conduct in order to claim it as a deduction. However, your home office still has to be used exclusively and on a regular basis as the place where you do your administrative or management activities or you cannot use it as a deduction. This new rule was designed to help those who perform their primary duties at client sites or customer offices, such as doctors, trades people and salespeople.
To claim the deduction, you use Form 8829, Expenses for Business Use of Your Home. If you use a portion of your residence for business, you may deduct the depreciation, real estate taxes, insurance, mortgage interest, utilities and repairs related to the part of the house. (This applies to renters as well.) You may also deduct expenses related to a portion of your home in which you store inventory or samples, even if this isn't the sole purpose and use of this part of the house. Here are some tips for increasing your deductions.
The size of your deduction depends on what percentage of your house, measured in square footage, you use for business. For example, if you determine that 15% of your home qualifies as your home office, you'll be able to deduct 15% of your real estate taxes, home owner's insurance, mortgage interest, and utility bills from your business expenses. The IRS often sees home office write-offs on your tax returns as a red flag, so you need to be careful when calculating your deduction percentage. Make sure they are accurate and not a calculated estimate. Be prepared to provide blueprints and documentation for all home office expense deductions you claim. Keep in mind, the IRS has access to information that enables them to double check allowable home office deductions on its own. When in doubt, refer to IRS Publication 587, Business Use of Your Home.