Every year, thousands of homeowners convert their garages into home offices. Some choose to work from home so they can care for an aging parent. Others create second jobs for themselves to supplement income. Still others decide to drop out of the rat race, strike out on their own and become entrepreneurs.
If you currently use your garage as a home office, you may be in for some tax deductions. However, there are stipulations the space must meet before the IRS will allow these write-offs.
You must use your home office exclusively for business. Still parking your 1956 Chevy in the garage? Then it doesn’t qualify as a home office, at least not to the IRS. Do you have to walk around the lawnmower to get to your desk? Ditto. To qualify as a deduction, your garage must be used only for business purposes. Period.
You must use your home office regularly for business. The IRS doesn’t clearly define “regularly,” so it’s going to be a judgment call. Safe to say that the space must be used for business on a continuing basis, not just occasionally. You may qualify if you work a few days a week from home, or maybe a few hours each day.
Your home office must be your principal place of business. You must conduct the management or administrative activities of your business from this office.
Plus, there can’t be any other fixed location – say, an office outside the home – where you carry out those duties.
Actually, even if you have another office location, there are two ways you can still fulfill the “principal place” of business stipulation.
- You meet clients/customers at home. If you regularly use the home office to meet clients or see patients, even if it’s only one or two days a week, you could qualify for the deduction. You can still use the space for other business purposes like keeping books or making phone calls, as long as they are business-related.
- You use a separate building for your business.
This applies if your garage is detached from your home. It doesn’t have to serve as your principal place of business or be the place where you meet patients or clients. It simply has to be used strictly for business, not as a storage shed/office or clubhouse/office.
How Much Can You Deduct?
If you meet the requirements above, you most likely will be able to deduct a percentage of the costs necessary to maintaining your home: These include:
- Mortgage interest
- Real estate taxes
In most cases, your deduction is determined by how much square footage of your home your office occupies. For example, if your home is 6,000 square feet and your garage/home office is 600 square feet of that total, you can deduct 10% (600/6,000) of your home utilities, rent, insurance, etc. These deductions are taken from the net income of your business.
Keep Good Records
The key to maximizing your deductions – and getting IRS approval – is maintaining excellent records.
Save all your applicable receipts and bills and file them in an orderly fashion. If you see clients or patients, maintain an appointment book that lists the date, time and name of each person with whom you met. Save this book for a minimum of three years in case the IRS audits your tax return.
Take every measure you can to prove your right to deduct home office expenses. These include having business mail sent to your home, putting your home address on business cards and stationery, keeping track of the time spent working at home, installing a separate business phone, even photographing your home office.
One more thing. You probably noticed that the words “may” and “could” were used frequently in this blog. That’s because tax laws are not only complex, but ever-changing. Our advice is to consult a tax professional. He or she can go over all your options and guide you through the process.
Perhaps you’re a DIYer when it comes to tax preparation. Then we strongly recommend you visit the IRS website.