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Managing Your Business

How to Maximize Work-From-Home Write-Offs

June 7, 2016 4 min. read
Academy / Work-From-Home Write-Offs
write off working from home

Technology has made it easier than ever to work from home. Live video feeds put you in direct contact with your boss, and cloud storage allows you to work on files you share with colleagues.

Working from home is almost like sitting in a cubicle surrounded by your professional peers. And if you’re self-employed, your office location couldn’t be more convenient!

Another benefit of working from home receives little or no attention: When the month of April arrives, you can take advantage of several tax benefits.

You just need to know how to maximize work-from-home write-offs.

Maintain Meticulously Prepared Financial Records

The Internal Revenue Service (IRS) strongly recommends that work-from-home professionals maintain detailed and itemized records that justify any deductions taken for tax reasons. In addition to writing down deductible expenses, you should also log the expenses into a spreadsheet or expense tracking software like Jobber.

Save every receipt to prove that you paid for expenses that the government allows work-from-home contractors to deduct from income taxes. Proof of payment receipts includes cancelled checks, bank statements, and individual paper receipts. The IRS is especially interested in documentation for vehicle fuel and mileage deductions.

Primary Location of Business

For independent contractors and other professionals who work from home, many of the tax deductions declared must pass the regular and exclusive “use litmus” test imposed by the government. Your home office must be where you conduct the majority of your business activities and it must be exclusively used as office space. It can’t be a seat at your kitchen table, or a desk in a guest room or den.

Of course, this doesn’t mean that independent contracting painters must exclusively paint the inside of their own homes. It means that work-from-home professionals must make their homes the primary location of the business, whether that means the place where they meet customers or perform business operations.

The Cost of Doing Business

You can deduct any expenses that repair or help you keep up your work-from-home infrastructure. For example, if you rewire the lighting in your home office, the tax code permits a 100% deduction. Other business expenses that shave your tax bill include office supplies and telephone charges. The deductible work-from-home expenses require you to submit documented evidence.

Not So Obvious Work-From-Home Write-Offs

Direct business expenses are easily identified by expense receipts and/or records. Come tax time, you simply write-off what appears in your business records.

However, many work-from-home professionals fail to take advantage of indirect expenses that produce tax write-offs. If your home qualifies as a business location, you can deduct utility bills, homeowner insurance, and home security system expenses from your tax bill. The key to claiming indirect expenses involves proving how much of your home is allotted to your home office.

Home Depreciation

A home depreciation write-off often requires the help of an experienced tax preparation professional. If you own a home, you deduct the depreciation generated from the business section of your home.

A tax preparation professional calculates what percentage passes IRS scrutiny. Renters deduct a percentage of rent equivalent to the percentage of the home or apartment used for business.

Where Things Get Interesting

The best way to prompt an IRS audit is to take too much off your tax bill for property tax and business loan interest expenses. Follow the clearly written formula created by the IRS to maximize work-from-home interest and property tax write-offs. Remember that the less you owe in income taxes translates to a lower social security tax bill.

Final Thoughts

Submit all work from home, business-related expenses on the Employee Business Expenses form (Form 2106). Attach Form 2106 to your 1040 income tax form and make sure the numbers on each form match.

Maximizing work from home write-offs can save you enough money to reinvest the savings into your business. However, the financial penalty imposed by the IRS for submitting incorrectly calculated work-from-home expenses negates that financial benefits of work-from-home tax write-offs.

We recommend work-from-home entrepreneurs hire a professional tax expert not only to reap the greatest financial rewards, but also to avoid stringent IRS penalties for submitting incorrect work-from-home business expenses.

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