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Apartments used for business can also qualify for IRS deductions — but make sure you know the rules and exceptions.
Almost everybody knows that owning a home equals tax breaks. If you rent, however, conventional wisdom says you’re out of luck. Not true! If you use your home for business — even if it’s a rental — you may be able to claim the home office deduction on your federal income taxes. The good news is, for tax purposes, the definition of a home applies not only to properties you own but to rentals, too.
Of course, when it comes to taxes, nothing is completely simple (it’s a 4 million-word tax code, remember?). Rules and exceptions still apply. To help you sort it all out, we looked at a few of the most common questions for renters who work from home, at least part of the time.
I do most of my work from my apartment. Does that count?
To qualify for the deduction, you must use your home — no matter how it’s defined — as your principal place of business.
That doesn’t mean that you can’t have more than one place of business: it simply means that you must use your home “substantially and regularly” (that’s the IRS criterion) for business. That sounds subjective. And it is. Generally, you can satisfy the rule if you meet clients at your home office as part of your normal course of business. That’s true even if you also carry on business at another location, including a different office or your local Starbucks.
I meet that criterion!
Well, there’s another hurdle. The space you claim must be used exclusively for conducting business. That means you can’t use it for any other purpose. Parking your laptop on the kitchen table doesn’t transform the kitchen into your office; ditto if you meet clients in your living room (no matter how nice your new sofa is). The space must be clearly exclusive, but it doesn’t have to be completely separate from your other living space (you don’t, for example, have to claim an entire room as your home office — the old “locked door” rule no longer applies).
What if I’m not self-employed?
Most people assume that you have to be self-employed, but that’s not true: the deduction is also available to employees who work from home. However, in addition to the exclusivity requirement, your work space must be for the convenience of your employer and not because it’s simply easy for you. You have to pay all of your own expenses, as well: to claim the deduction, you cannot perform services in a space that you also rent to your employer.
How do I calculate the percentage of my home used for business?
It’s simple math. First, determine the square footage of your entire home. Next, measure the room or part of a room that qualifies as your business space. Divide the space used for business by the total square footage of your home. The resulting percentage is what you’ll use to prorate your expenses. Here’s a quick example: Suppose your apartment is 1,000 square feet and the space you use for business is 200 square feet. You’ll figure your deductions by prorating expenses by 20 percent, or 200/1,000.
What expenses qualify for the deduction?
To figure the home office deduction, qualifying expenses for homeowners may include mortgage interest and real estate taxes. But that doesn’t mean that renters are stuck: payments to your landlord count. Qualifying expenses for homeowners and renters also include items like home maintenance, including renter’s insurance, electricity, security systems, heating and cooling systems, and the like. It may also include Internet and a secondary phone. It’s important to note that the IRS does not allow a deduction for a primary phone in your home even if you use it only for business (the IRS considers it a personal expense nonetheless).
OK, so how do I calculate my total deduction?
Multiply the percentage of your home used for business by your total expenses. The resulting figure is your deduction. Using our earlier example, let’s assume your total expenses are $8,000. Your deduction, reportable on a Form 8829, is $1,600 (or the 20 percent you figured as your prorated value multiple).
What if I’m terrible at math?
If you’re looking for something a little easier, the IRS now offers a simplified option for calculating the home office deduction: multiply the square footage of the portion of your space used for business by the prescribed rate. The current applicable rate is $5 per square foot up to a maximum allowable square footage of 300 square feet. Again using our example, if you use 200 square feet of your home for business, your deduction is $1,000, or 200 square feet x $5/square foot. In our examples, the deduction calculated under the simplified method isn’t less than the traditional method. That’s not all that unusual, depending on the individual circumstances. Don’t let the numbers fool you, though: If record keeping isn’t your strong suit, the simplified method is likely best for you.
Nothing easy is ever free
One more word of caution: No matter which option you choose, remember that the IRS requires that you keep excellent records to substantiate your expenses!
See more at: http://www.trulia.com/blog/can-renters-claim-home-office-taxes/#sthash.MU4zMIVT.dpuf
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