Work out of your home and avail home office tax deduction

Work out of your home and avail home office tax deduction

Home office tax deduction enables you to decrease your tax bill simply by managing your home as your workplace. The business utilization of your house makes it possible to cover part of such household costs as utilities, rent, insurance, depreciation, mortgage interest, real estate taxes, repairs, and improvements.

In order to make the grade for such a deduction, you need to fulfill some basic requirements. The most important one is that you use a specifically allocated area of your house exclusively for business purposes. This implies two things: You use the house regularly for business on an ongoing basis for some hours every day or for some days every week.

Second, you make sure that no personal activities get intermingled in the business part of your house. It should not happen that you convert it into a guest room at night and office space in the morning. An exception to this rule is that part of your house where you store business samples. This can be considered personal space.

Also, the home office deduction holds good only for a bona fide business that shows clear profits and clear losses. A business activity that is more of a hobby than a commercial enterprise does not qualify for tax deduction.

In addition to using your home on a regular and exclusive basis for business, it is also essential that your home be your primary place of business. This implies that if you are working from two or more locations, then of all these places, your home has to be your principal 'office.' This can be ensured by using your home work space for most of your managerial and administrative activities.

Thus it is not compulsory that all activities taking place at home should be your chief source of revenue. What is essential is that your home is used for book keeping, ordering goods, planning meetings and for consultations with clients / patients / customers.

It may be necessary, at times, to prove that you are using a part of your home as an office. In this case you should have the following proofs ready:

1. Draw a diagram to show which part of your home is being used as your office. If possible, take photographs to give a clear idea.

2. Make sure that all business mail comes to your home.

3. Your business cards and stationery must list your home address as your business address.

4. You must get a separate phone line installed in the business part of your house.

5. Keep a record of the visits of your clients or customers to show that you have actually conducted business at home.