Listening to these will lose you money!
Yes! This deduction is probably one of the most misunderstood out of any on your tax return. Here are the top 3 myths:
1.) If You Take It, You’ll Get Audited
FALSE: The IRS isn’t that crafty. They do not put a deduction out there and dare you to take it! In fact, they have insured abuse by not allowing you to take most of it if you already have a loss on your business. You can always deduct the mortgage interest & real estate tax portion of your home office. However, you can only deduct the operating expenses (insurance, repairs, utilities) to the point where you have zero income. You cannot use this to create a loss. The remainder is carried over to the next year.
What leads to an audit is abuse of a deduction. If you show $30,000 in home office expenses, you may just get audited!
2.) If You Move, You Have To Pay It Back
FALSE: Unless you use accelerated depreciation for your home, you do not have to pay anything back. In fact, most people do not even depreciate their home for the home office deduction. The operating expenses are just that, expenses to operate the portion of your home used for your office. It would be like telling a traditional office business they have to pay back their utility bills if they move their office.
3.) It’s Too Hard For So Little Money
FALSE: You could say that about most all home based business tax deductions. Most, by themselves, have a small to medium effect on taxes, but when used all together, you can save up to $5,000 per year on your taxes. Now, if you invested just the incremental tax savings in an IRA or other account, you would have a pretty good sum of money! The difficulty is not that bad as all business people should have a good bookkeeping system in place regardless!
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Disclaimer: Not all tax deductions are suited for everyone’s individual situation. This is general advice only. This is not intended to be legal advice. Please consult your tax preparer for all matters.