If you work from home and you meet the requirements to take a home office deduction, it might seem like a no-brainer to take the deduction on your federal income taxes. Less taxes are good, right?
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 about taking a home office deduction on your income taxes:
It makes a difference whether you are an employee versus a self-employed individual. Different rules apply for employed telecommuters than apply for independent contractors. If you are an employee who works from home, you may not find this deduction to your advantage.
First of all, telecommuting employees are subject to more restrictions than independent contractors. Telecommuters must be working from a home office for the sake of convenience of their employer. Also only the portion of the employee's unreimbursed business expenses (which include the home office) that is greater than 2 percent of the employee's adjusted gross income is deductible. In all, the deduction will likely have less of an impact on telecommuting employees' tax bills than for those filing a Schedule C.
Profit and Loss
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.
Selling Your Home
Before you ever take a home office deduction, you need to think about the long term. 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. However, if you have always used the simplified home office deduction, which was instituted in 2013, this does not apply. But you have to choose the way you are going to file and stick to it. For more details, see IRS Publication 523 Selling Your Home.
The Possibility of an IRS Audit
There is a belief that taking a home office deduction possibly increases your chance of an IRS audit. Although The Balance's tax expert William Perez thinks this bit of conventional wisdom may not be as true as it once was, he notes that filing a Schedule C may increase your chance of an audit. Of course not everyone who files a Schedule C also takes the home office deduction. To be safe always keep good records of all business expenses including those for your office.
For more information regarding home office deductions, see IRS Publication 587 Business Use of Your Home.
I am not a tax attorney, CPA or tax preparation specialist. The information here is meant as a general guide. For specific questions about your own taxes, please refer to IRS publications or consult a tax specialist.