Home Office Deductions Pros and Cons

Filed in archive financing on February 8, 2007

Some self-employed individuals may opt to declare an application for tax deduction based from the office that they have set-up at home.

Though declaration and seeking of approval for it had not been as hard as it has been before, the internal revenue service or IRS are still on the look out for probable loopholes on any application.

Below are some of the advantages and disadvantages of seeking the said tax deduction:

Advantages:
1. Sure-fire reduction on taxes to be paid. If properly supported by reliable documents, it can decrease one's tax by a considerable amount

2. Repairs and maintenance. Such costs can likewise be deducted, as well as the rent (divided in accordance with the space occupied) or mortgage.

Form 8829 will be used to determine the amount of deduction.

Disadvantages:
1. Office space. The IRS requires that the specific area declared as the home office be of regular use for its operation. Although it does not necessarily imply that it has to be the "only" office, still, for a house of small proportions, this would mean a lesser area for the children's play room or a smaller living room.

2. Activities performed on the area must be proven to the IRS that it cannot be just done elsewhere. This may be a hard matter to justify, say, preparation of billing may be done using a laptop at a regular coffee shop, and the likes.

Employees may also apply for the deduction if they have not been provided with an office space by their employers, and when they can prove that it is reasonable and not just for their personal (and their employer's) convenience. Allowable expenses may be computed using the worksheet that can be found in IRS Publication 587, Business Use of Your Home.