Working from Home & Tax Advantages

When going to work means heading for your office in the basement of your home, it's sometimes hard to maintain a clear boundary between home and business. If for no other reason than your federal income taxes, however, you may want to keep the two separated.
Deductible Expenses

When certain tax rules are met, owners of home-based businesses and professional practices may deduct various expenses related to using their homes for business purposes. Examples include:

• Heat, air conditioning, and electric
• Homeowners insurance
• Trash removal
• Cleaning services
• Building depreciation

Since many of these expenses relate to the entire home, the business portion of an expense is usually estimated using square footage.

Example. The square footage of Jane's home office is 10% of her home's total square footage. Jane's home heating bills totaled $1,800 last year. She may deduct $180 (10%) as a business expense, provided she meets the tax law's requirements for a home office deduction.

For Business Only

Deductions for an office in the home are generally available only if the space is used regularly and exclusively for business. The exclusive-use rule can be particularly difficult to follow.

Example. Victor uses his home office strictly for business on workdays. But he also uses the room as a guest bedroom. Victor's office doesn't qualify as a home office, even though there is no personal use of the room during business hours.

Selling Your Home

While home office deductions can save you taxes currently, there may be a tax price to pay when you sell your home. Even if you otherwise qualify to exclude capital gain on the sale, you won't be able to exclude all of your gain. Under current law, the amount of gain attributable to depreciation for business use of your home (after May 6, 1997) is subject to tax at a maximum rate of 25%.