If you are self employed and working out of the home, you may be entitled to a home office deduction. According to the Internal Revenue Service (source: IRS Tax Tip 2009-53), taxpayers who use a portion of their home for business may be allowed a home office deduction provided they meet certain requirements.
This article is not about whether or not you qualify for a home office deduction, since a tax advisor is the best person to ask about your situation. Instead, you’ll learn as to what home office records must be kept to assist your accountant at tax time.
Determine floor area
A lot of home office expenses are calculated based on percentages. To do this, your accountant will need the square footage of both your house AND your office. With these two numbers, he can determine what percentage of the home is used for business and will apply that percentage to some of your household costs to come up with a legitimate home office expense.
What home office expenses to track
I’ve been self-employed and have had a home office for 30 years. While my deductions will probably differ from yours, start your record keeping with the following expenses and then let your accountant take it from there:
1.Utility bills which includes heating, electricity, water, and sewer. If for example, your accountant decides that 5% of your home is used for business, he may take 5% of these utility bills as a business expense.
2. Phone and Internet bills should also be kept. Since these will be calculated based on use, keep an eye on what percentage you think the phone & internet are being used for business purposes and what percentage is for personal use.
3. Invoices connected with repairs & maintenance to the house that impact your office area. This deduction gets a little dicey for most self employed entrepreneurs to figure up on their own since not all home repairs impact the office space. Do what I do, and just keep track of all repairs, home maintenance costs, and home improvement costs, and let the accountant figure out which deductions you can take.
4. Property taxes, property insurance, irrigation fees, and HOA dues may also figured into a home office deduction. These receipts should also be kept.
5. Also keep track of your mortgage payments or rent since your accountant may be able to apply a percentage deduction to these figures.
6. Last but not least are records for Mortgage interest and casualty losses.
By keeping these records, you should have all the paperwork required for your accountant to figure up the home office deduction, which will save a lot of time and headache at tax time.
On a final note, one publication that all new, self employed business owners should read is Publication 587 from the Internal Revenue Service. This publication goes into great detail as to what home office deductions you may be entitled to, and how to calculate these deductions if you self-prepare your tax returns.