Many small business owners don’t take the home office deduction seriously. It’s easy to understand why. Home offices are a very difficult deduction to qualify for. Add to that, timid taxpayers have been warned against claiming a home office for decades, threatened with certain audit. Three things have changed since this red flag warning was first issued.
Even if you get over the red flag concerns, you may wonder if it’s worth it. Consider this:
First, any home office must be used regularly and exclusively for business. That’s right exclusively. No, your kids may not do their homework in your home office. Furthermore, the office must qualify as a principal place of business. This is serious red tape!
Second, recordkeeping is substantial. You must keep up with (and have available upon audit) utility bills, insurance payments, property taxes, mortgage interest, home depreciation, and direct costs all year long.
Finally, if you get this far, once you do the math you may find that all this effort only put a few hundred dollars in your pocket. A few hundred dollars is a few hundred dollars for sure – but for all that effort you may well wish it was more.
Many small business owners see all this red tape and are too quick to dismiss the value of this deduction. The true value of the home office – it’s real superpower – is that it changes your commute. “My commute?” you ask. Yes – your commute.
You see, communing miles are never deductible. This means when you travel from home to your main place of business you may not deduct the cost of transportation. Yep, all those miles go right out the window. Think of what this could mean.
If you live 15 miles from the office this could mean losing a $4,350 deduction.
(58 cents per mile x 15 miles x 2 times a day x 5 days a week x 50 weeks a year)
If you establish and maintain a home office, your home becomes a place of business. Since travel between places of business are always deductible you would qualify to deduct the $4,350 in travel expenses. In many cases this travel deduction is triple the raw home office deduction.
Don’t give up on the home office. Its real superpower is turbo charging your vehicle expenses.
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Don’t wreck your most valuable deduction
Uncle Sam's allowance for vehicle expenses is one of the least understood deductions. Of course car and truck expenses are allowable, but how are they maximized? What records are necessary to survive an audit?