Now that you’re raking in the dough on Associated Content, you want to keep as much of your writing income as you can. You’re thinking about setting up your home office so that you can take the deduction on your taxes, but you aren’t sure about how to go about it. Cheer up. There’s plenty of information available to you on the IRS’s website as to what is allowable and what is not. You can order or download Publication 587 which gives clear examples, worksheets and all the information you will need to make your home office deductions audit-proof. If you follow the rules diligently and can properly document your expenses, then you have no reason to worry that your deductions will be disallowed.
Pass The Tests
The main test for the home office is “Exclusive Use” of a certain area of your home. Ideally, you know you want your own little office anyway, but what if you don’t have a spare room in your home? It can be a part of a room, and that part of the room does not necessarily need to be partitioned off. However, it must be a definable space that is used both exclusively and regularly for your business. So, setting up your computer on the dining table where your family meets for meals every day is just not going to cut it.
There are exceptions to the exclusive use test. They apply to people who using part of the home to store inventory or product samples, when the trade or business is wholesale or retail selling of products. Another exception is when part of the home is used a day-care facility.
Once you have defined your home office space, take a picture of it and put it in the file you are going to set up to keep great records of your deductions to make sure you are audit-proof.
Now you’ve got to make sure that you use that space for business purposes on a regular basis. Your home office must also be your principal place of business for the income-producing activity. Now, suppose you have another job, as a salaried employee. Well, if you’ve set up the home office and it’s where you regularly do your writing for Associated Content, then it is your principal place of business for your writing income. What if you have a notebook and write some articles on the fly? That’s not a problem as long as the majority of your writing is done at the home office. When you do that, you’ve passed the regular use test.
Calculate The Area of Your Home Office
Generally, the amount of the deduction depends on the percentage of the home that is used for business. The IRS says that a taxpayer can use any reasonable method to compute the area, but usually, all you have to do is divide the area of the home office by the total area of the house. Actually, on the form you need to file – Form 8829 – you have to put in the total area of your home, so if you don’t know it, you might as well figure it out.
Keep Good Records
Documenting all your income and expenses is important. Don’t just keep a record on your computer. The best thing to do is make a backup CD and also print out whatever you have on your computer that relates to your taxes. You should also save any worksheets you use in your calculations to arrive at your final figures.
You really want to be scrupulous about your deductions and make sure not to deduct any personal expenses that will get your return flagged. The IRS estimates that abuse of home office deductions accounts for at least $30 million in unpaid taxes and, consequently, they make every attempt to be vigilant about inflated figures. Of course, many people don’t take deductions that they are legitimately entitled to because they fear an audit. Fear not. Educate yourself and discipline yourself to keep good records, and don’t fudge on your figures. Your return will be unassailable and you will be audit-proof.
Finally, it is important to note that you cannot use the home business deduction if it will create a loss. Publication 587 will help you figure out if any portion of your deduction will be allowed, and you can carry over the unallowed expenses to the next year, so don’t just throw up your hands and say it’s not worth it. If you keep your records in order and you make more money in the next year, those unallowed expenses are going to come in handy.