But be careful. A home office deduction is not always in everyone’s best interest. Consider the pros and cons of a home office deduction. And if you have any doubts, consult a tax specialist for your specific circumstances. Here are some things to consider before taking a home office deduction on your income taxes.
Employment Status Affects Your Home Office Deduction
It makes a difference whether you are an employee versus a self-employed individual. You can no longer file for this deduction if you are an employed telecommuter. If you are self-employed, you’re eligible for this deduction whether you rent or own your home, as long as it is your primary place of business.
Is It a Profit or Loss With Your Home Office Deductions?
If you are an independent contractor, remember that your home office may not create a loss for your business. That means that independent contractors who are filing a Schedule C must first calculate whether their business has a profit or a loss. Then they can subtract the home office deduction, as long as it does not create a loss.
Your Deduction Could Change If You Sell Your Home
Before you ever take a home office deduction, you need to think about the long-term possibilities. When you sell your house, after having claimed the home office deduction, the deduction can affect your capital gains taxes. The capital gains tax exclusion allowed from the sale of your primary residence could be reduced by the amount that you have claimed for depreciation on your home office.
The Possibility of an IRS Audit
There is a belief that taking a home office deduction possibly increases your chance of an IRS audit. The Balance’s tax expert William Perez thinks this bit of conventional wisdom may not be as true as it once was, though he notes that filing a Schedule C may increase your chance of an audit. You can alternatively use the simplified method, which allows you to deduct “$5 per square foot of the portion of the home used for business,” according to the IRS.
