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Suppose I rent a 100 square foot apartment (just to keep the numbers easy). Now suppose I use a 30 square foot area exclusively for working-at-home. In that 30 square foot area there'a desk containing strictly work-related materials and a computer that's used strictly for work. Assume the monthly apartment rent is $1000. How can I "write-off" some of that rent?

p.s. Also assume I earn $2000/mo (before taxes) from my work-at-home business.

  • 3
    Tax laws vary from country to country. Is this in the United States? – Alex B Sep 8 '10 at 14:31
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Be ruthlessly meticulous about the IRS regulations for deducting a home office. If it's allowed, it's allowed.

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    +1 This is one of those deductions that the IRS uses as a yellow flag when deciding who to audit. – JohnFx Sep 8 '10 at 20:19
  • just FYI that link seems to not work. that's a great tip that it is a "yellow flag" for The Man ... – Fattie Oct 13 '16 at 21:50
  • Updated the broken link – mbhunter Oct 16 '16 at 4:45
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Tax regulations vary from country to country - some permitting more deductions, some less - but here are a few guidelines.

As regards the home-office:

  • it must be a recognisable area (i.e. a room with a door is useful, or a clearly demarcated region of the apartment that has limited alternative use);
  • the onus is on you to prove it should you be subject to an audit;
  • the amount you earn from that office is as immaterial as it would be in any other business (subject to paying tax on the profits, that is).

As regards the deductions:

  • usually this is related to the proportion of the apartment used, however, that is not always limited to the office itself;
  • by working from home you are also using facilities like the bathrooms and common areas that you would normally pay for in office rent - some tax laws permit the prorata deduction of these as well (based on hours of use);
  • you are also paying electricity, insurance, rates and other expenses incurred in the ownership/ rental of the property which also cover the office and time spent in the office;
  • any furniture or improvements to your office may also be expensed;
  • if you own the home then the interest component of your capital payments may also be deductable.

Think of it like this: in order to have space for a home-office you needed a bigger home. That leads to increased rates, heating, insurance and so on. Many tax regulators recognise that these are genuine expenses. The alternative is to rent a separate office and incur greater expenses, leading to increased deductions and less overall tax paid (which won't finance the deficit).

The usual test for deductions is: was the expense legitimately incurred in the pursuit of revenue? The flexibility permitted will vary by tax authority but you can frequently deduct more than you expected.

  • "Limited alternative use" is a critical point for the US tax code. The safe answer is no use other than the business use -- move everything non-work-related out of the office area, and I mean everything from books to your kid's toys. It's a lot easier to defend a physically bounded space such as a room. Again, this is one of the most misused and misunderstood portions of the tax law and the IRS is going to be very skeptical about it; assume you will have to defend it and that they will be merciless about strict interpretation. – keshlam Oct 16 '16 at 9:45
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Before starting to do this, make sure that you are squeaky clean in all aspects of your tax preparation and are prepared to back up any claims that you make with documentation. Home office deductions are a huge red flag that often trigger audits.

Follow mbhunter's advice and be incredibly meticulous about following the rules and keeping records.

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