Get the Breaks You Deserve
If you work from home, you may qualify for the home-office tax deduction.
To take a home-office tax deduction, you need to pass two tests: You must use the space for work on an exclusive and regular basis, and your home office must be your primary place for conducting business or meeting with clients. There's another condition if you're an employee of a company: Working at home must be for the convenience of your employer -- for example, if your company doesn't have a physical office. No dice if you have a boss who lets you telecommute.
Then there's the question of which deductions are fair game. Bryan Rhodes, a CPA in Arlington, Tex., breaks the list into two types of expenses. Indirect costs -- such as mortgage interest, property taxes, homeowners insurance, and general maintenance and repairs -- are generally deducted proportionately by square footage. So if you have a 150-square-foot office in your 1,500-square-foot home, you can deduct 10% of the indirect costs. Direct costs -- such as furniture, equipment, supplies and postage -- are fully deductible (for more on the home-office deduction, see IRS Publication 587, Business Use of Your Home).
You can deduct up to $125,000 of the cost of equipment and furniture you buy for your home office this year, or you can depreciate some or all of these costs, spreading your tax breaks over several years.
A few caveats: Taking a home-office deduction could signal the IRS to look more closely at your tax return. Your deduction for business use of your home can't exceed your gross income for your business. And any portion of your home that qualifies as business property is not eligible for the capital-gains-tax exclusion when you sell your home.