Working from Home? Consider These Legal and Tax Tips!

The following paragraphs contain 10 tips for those running their own home office, pulled together from my own accumulated wisdom when I practiced law from my own home, as well as many consultations with my clients.

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1) You Might Need Extra Insurance:

My own homeowner’s insurance didn’t come with any liability for my home office. As an attorney, I tried to be careful about how I arranged my business in order to limit any liability I had. Under state law, I’m a professional corporation. It didn’t seem like it made sense to me to open myself to potential losses and extra liability by neglecting insurance. Once I consulted my insurer, I chose to get a rider which included coverage for both equipment and liability protection if anyone happened to get injured in my home or on my property.

2) Zoning Laws Might Impact Your Practice:

A lot of professionals think that if they open a home office, then it has nothing at all to do with neighbors, much less local authorities. This simply isn’t true. Contingent upon what type of business you operate, your ability to even work from home, even including seeing customers or clients, might be restricted by your community’s local zoning laws. Even when home offices might be permitted, it’s possible that there could be restrictions on things like parking, signage, hours of operation, and even the number of outside employees. You’ll have to check with your local zoning board or local zoning code for confirmation.

3) Not All Will Qualify for The Home-Office Deduction:

I realize that the home-office deduction might feel like it should be automatic if you’re working from your home. However, just like all other deductions, there are criteria to meet. The home-office deduction comes from Section 162 in the Internal Revenue Code, which permits it as a potential business expense. In order to qualify for being a deductible expense, as per official IRS guidelines, then the business expense has to be both necessary and ordinary. Necessary expenses are those deemed as appropriate and helpful for a person’s business or trade, whereas ordinary expenses are ones deemed as accepted and common in someone’s business or trade.

In order for you to get the home-office deduction, you need to use a part of your home that’s specifically for business that is done regularly and exclusively for your business or trade. Also, that portion of your home has to be the principal place where you do business. It could also be a place wherein you deal or meet with clients as part of the normal routines in your business or trade. It can even be a distinct structure that’s used in conjunction with your business or trade. In short, for your home office to be deductible, it has to actually be your office, and not just some space where you sometimes work.

If you make use of any part of your home for a working space, then it has to be only a working space. That’s crucial. It’s not mandatory that you have a door with a lock, which was a very popular misconception stemming from older rules, but the space has to be delineated clearly from your own personal space. You can’t just write off the living room due to reading briefs on the couch or typing things on your laptop. A home-office space has to be used exclusively as a business space.

4) Accuracy Is Necessary to Calculate the Home Office Deduction:

Typically, how much you might get to deduct will be contingent upon what percentage of your overall home is used for business. If you’re able to easily separate any expenses that are related just to your home office (for instance, a distinct structure like a garage), then you can probably deduct any actual expenses you can identify.

On the other hand, if your home office expenses are hard to distinguish from your overall home expenses, then you can likely calculate a home office deduction through a method of prorating its use. Determine what amount of space that is attributed to your business and then compare it to the total. For instance, if you have a home office space of 100 square feet in a 1,000-square-foot home, then you’d claim 10 percent of any home-related expenses towards the home-office deduction.

Home-related expenses would include things like homeowner’s insurance, mortgage interest, taxes, security systems, utilities, and other various maintenance expenses. You should also consider that if you’re renting a home, then this is a time where you might take advantage of rental payments as a potential deduction, as your rent would be considered a certain expense that can be prorated towards the home-office deduction.

On the other hand, if you have rooms in your home that are generally each the same size, then you can calculate what percentage your business uses just by adding up the total number of rooms before dividing how many rooms the business uses. So, for instance, should you have ten rooms, with one room used for business, then you’d claim 10 percent of home-related expenses for home-office deduction purposes.

Regardless of the choice you pick, make sure that you are precise. Avoid rounding numbers, since that can draw the attention of the IRS. Aside from rent, just when was the last time you actually paid a bill that happened to be exactly $500? Always use figures that are based in reality.

5) Prorate Expenses Which Might Be Used for Either Personal or Business Use:

If you’re like me, then you probably don’t have online service at home that’s just for your law company. You likely use the Internet for some fun and ‘off the clock’ emails. If you happen to mix personal use with business use, then you have to divide the whole cost of the two, just based on usage. You’re only able to deduct business expenses for any piece that can be attributed to the business. As such, if you’re using 60 percent of your Internet service for your business, then you’re able to deduct 60 percent of its cost. That rule will also apply to using other utilities and expenses, with the exception of your home telephone line. The IRS considers that routinely personal, so never deductible, even as a prorated item. However, you can deduct any costs involved with a cell phone or dedicated second line.

6) Reconsider Claiming A Home-Office Deduction If You Intend to Sell the Home:

If the home-office deduction is something that you claim, then you might not be able to later claim a full capital gains exemption for selling your home. This one exemption is one you shouldn’t miss if you can avoid it, because taxpayers can sometimes exclude as much as a quarter million dollars in gain from selling a principal home. That can go up to a half a million dollars for couples that are married, provided they’ve owned and lived in the home for at least 2 up to 5 years before selling the house. It is possible for the home-office deduction to not make up for this exemption loss, so consult your tax professional in order to see where the numbers work out best for you.

7) Maintain Great Tax Records:

The home-office deduction is claimed using federal form 8829, otherwise known as “Expenses for Business Use of Your Home”, and generally filed with a Schedule C, otherwise known as “Profit or Loss from Your Business”, on your individual 1040. Even though it’s not necessary to offer documentation alongside your form, you should retain any records which support your deductions for a minimum of three years, even though many tax professionals are starting to suggest six years given aggressive IRS stances regarding statute of limitations claims. Records could include bank statements, receipts, copies of bills, and credit card documents. You might even want to maintain a journal of long-distance calls and other extraordinary expenses. Make sure you keep such journals and annotated records up to date, because trying to reconstruct these records afterwards is nearly impossible. To help yourself out, you might want to scan records in order to keep the clutter to a minimum; just be sure your scanned records are legible and easily accessible.

8) Avoid the Temptation to Cheat:

The IRS has estimated that up to 70 percent of those taxpayers reporting net losses via a Schedule C decided to artificially inflate the expenses in order to create the losses. One area that you might find tempting for bumping numbers would be the home-office deduction, since, who would really know after all? You should know that, statistically speaking, any taxpayers filing Schedule C forms are twice to four times as likely to get audited. Those odds aren’t your friend. Inflating deductions won’t just put you at risk of getting audited, but make you susceptible to penalties too. You can always report correctly without guesswork if you keep contemporaneous and meticulous records.

9) You Might Have to Get Extra Licenses for Your Company:

Your law license might not be the only one you have to have. Some municipalities require permission before you can open up shop. For instance, in Philadelphia, a new business has to register itself with the city before it can operate.

10) You Might Have to Pay Some Extra Taxes:

Some locations are places where claiming a home-office deduction might subject you to having additional local taxes, since for taxes purposes, any office is still an office, even if located inside the place you call home. Consult your tax professional when you’re not sure about this or anything else.

If you choose to work at home, be sure you’re reasonable in claiming expenses. Only do the ones that make sense and that you can prove. Getting aggressive on deductions is okay, so long as you’re smart about it. There’s much to consider if you choose to work at home or not, far beyond the matters of keeping the kids quiet for phone calls of just finding the space. In truth, working from home doesn’t always prove better or cheaper.