The Home Office Deduction for the Rooted and the Rootless

home office public domainThis scenario is becoming more common every year: Digital nomads are roaming the world, seeing the sights, visiting friends and earning a decent income through their web-based businesses and activities.

They might be renting apartments as they roam. They may be living on their boats or RVs; there are many possibilities. However, the footloose and fancy free lifestyle gets somewhat less fancy free every April 15. It turns out nomads aren’t exempt from income taxes.

But what about one of the basic deductions many small business owners take each year – the home office expense? Can you deduct a portion of the cost of keeping an apartment you only rent for a season, or part of the cost of your boat, or RV?

Home sweet home

The answer is yes. However, anyone who works closely with a good tax advisor will know that home office deductions can be red flags for the IRS auditors, so you need to be sure that you understand the rules, have your situation documented and are properly calculating your costs. Otherwise, someday you’ll find yourself peering across a desk at a guy from the government, armed only with a prayer and a shoebox full of receipts.

The IRS defines “home” to include house, apartment, condominium, mobile home, boat, or similar property which provides basic living accommodations. Whether you’re a digital nomad or located in one place throughout the year there are two basic requirements to qualify some of your living accommodations as a legitimate home office expense. The space must be used “regularly” and “exclusively” for your business.

The records you keep must show that you use that portion of your “home” exclusively and regularly for your business activities. You must also have records that document the area of your home that you use for business, the square footage or percentage for example.

Two expense methods

Until the 2013 tax year there was only one way to claim this deduction and that was by taking percentages of actual, documented expenses. In 2013, the IRS added a second, simplified, way to claim the home office deduction: they decided to allow $5 per square foot, without documenting actual expenses. However, they capped that at 300 square feet. In 2014 you can choose either approach for the deduction; however you have to stick with one method for an entire tax year.

Although IRS videos may not be the most popular viewing on the Internet, they can give you some sound information that will be useful to your small business. There’s a video of a webinar on the “business use of your home” as well as a PDF that outlines the basics.

The IRS has an extensive collection of presentations available through its video portal. Take a few minutes to explore. You’ll probably find some topics that will help your financial planning.

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