Working from home is a growing national trend; driven by technology and by the economy, more people are finding that working from home is how it’s going to be for the foreseeable future.

The question then is: “how do you maximize legitimate deductions to take advantage of this opportunity”?

First, we need to lay some ground rules – you need to speak to your personal tax advisor to ensure that you meet the specifics of the law – actions you may take based on this post should be discussed with a tax professional (as opposed to your well-meaning brother-in-law, who has a cousin, who dated a guy in high school who now delivers mail to the IRS – in other words – see a Certified Public Accountant, a Tax Attorney, or an Enrolled Agent for accurate advice!).

Next, what are the rules?

* In order to qualify as a home-office it has to be “a room or specific area” in your home or apartment set aside for your business. Sitting in your recliner with your laptop open while the rest of the family watches TV does not qualify.

* In general, your home-office should either be the principal place of your business, or a place where you meet or deal with clients or customers.

* If you don’t meet with clients in your home office, you can still qualify for the home-office deduction if it is your only business location. (For example, although I frequently work from home – particularly when I’m trying to be creative – I do not qualify because my principal place of business is at my office on Jollyville Road in Austin, TX.)

What are the benefits?

* Assuming that you qualify for the home-office deduction, you may deduct both direct business expenses (reasonable and ordinary expenses incurred in your business – advertising, bank charges, dues & subscriptions, etc.) AND indirect expenses – utilities, insurance, property taxes, rent, etc. – ALLOCATED PROPORTIONALLY BASED ON THE AREA SET ASIDE FOR THE HOME OFFICE DIVIDED BY THE TOTAL SQUARE FOOTAGE OF THE HOME.

* If you own the home, you MAY also deduct depreciation of the dwelling based on the proportion of space allocated – there are, however, significant drawbacks to deducting depreciation when you ultimately sell the home. BE SURE TO ASK YOUR TAX ADVISOR TO EXPLAIN THESE DRAWBACKS BEFORE DEDUCTING DEPRECIATION ON YOUR HOME!

* What may the biggest benefit to home-based businesses is that if you qualify for the home-office deduction – you may be able to deduct your mileage from your home to client meetings. There are special rules regarding deducting mileage and you should familiarize yourself with those rules or speak to your tax advisor regarding these rules…but this provision has the potential to be a huge deduction for business people working from home.

One last note:

* If you’re an employee who dutifully takes home a briefcase (or laptop) full of work to catch up on paperwork & correspondence – you probably don’t qualify for the home-office deduction. Employees qualify for the home-office deduction ONLY if they work at home FOR THE CONVENIENCE OF THE EMPLOYER. Even if your employer requires you to work from home, you still don’t qualify for the home-office deduction unless you meet the rules outlined above.

If you have questions regarding this, or any other tax-related issue you may be facing, please visit our website to schedule an appointment or give us a call at (512) 524-9065.