Can I Take the Home Office Deduction?

If you’ve recently started working from home or are running your business from a home office, you might wonder how that translates into income tax deductions. Though wage-collecting individuals are not entitled to write off home office expenses, self-employed workers, freelancers, independent contractors, and small business owners can.

Essentially, the home office deduction entitles qualified taxpayers to write off a portion of their home expenses against their taxes. The entitlement assumes you have a portion of your home or a separate structure on the property used exclusively for work.

Criteria for Home Office Deduction Eligibility

There are four main criteria for determining home office eligibility for the IRS. Your situation needs to fall into only one.

·       Exclusive use or regular use for office space assumes you use a portion of your home (apartment, condo, boat, or wherever you live) to conduct business regularly. Detached office spaces can be garages, greenhouses, studios, barns, ADUs, etc., but exclude any part of the property you rent to a tenant or use as a short-term rental, like a B&B or an inn.

·       Unattached or separate structure used in connection with a trade or business. Any separate, unattached structure used exclusively for work purposes qualifies. For example, a carpenter’s workshop, an artist’s studio, a greenhouse for a florist shop, etc. This building does not have to be your principal place of business or where you meet clients.

·       Exclusive or regular meeting space, also referred to as principal place of business, assumes the dedicated home office space is the primary location of your business or where you conduct client meetings, treat patients, serve customers, etc. Daycare and storage facilities don’t apply under this rule. Some exceptions apply, such as if it’s a room in your home that is also used for day-to-day family purposes. For example, if you use the space occasionally to prepare work, but it’s actually your family’s dining room, it’s not eligible for a deduction.

·       Exclusive or regular use for storage. Space in your home can be deducted as an expense if you use it to store inventory or product samples needed for your business—so long as your home is the principal place of business. Some exceptions exist to the exclusivity rule, such as spaces used at other times for daycare operations or rental use. As the business owner, the onus is on you to prove “regular” business use.

To learn more about IRS rules for home office deduction eligibility, check out the latest publication here.

Passing the Regular Use Test

Not all ventures will qualify you for a home office deduction. The more serious your business is in terms of income, activities, time, and effort put in, the better positioned you are to be able to claim.

Income generation is an essential component of the regular use test, but profitability isn’t.

So, what constitutes a home office?

As outlined above, a home office is either your principal place of business or where you meet with clients, customers, etc., and a place you use exclusively for business purposes.

The IRS defines a home office as a place used ten hours a day, seven days a week, for business purposes only. Technically, if your kids use the same space to watch TV or do homework, it’s no longer exclusive use.

How Much Can You Deduct for Home Office Use?

To calculate the portion of your home’s square footage dedicated to exclusive business use, divide the square footage of your business spaces by the area of your home and express it as a percentage. This is called the Actual Expense Method.

There is also a simplified method, which assumes $5 per sq ft up to a maximum of 300 square feet.

Most taxpayers use the actual expense method.

So, let’s say your home is 2,000 square feet, and your office space is 300 square feet. Divide 2,000 into 300, and you’ll get 15%. This is the figure you’ll use to calculate your deductions.

What Expenses Can Be Deducted?

Deductible expenses for home office use include most home expenses. Utilities, internet, rent, mortgage interest, insurance, depreciation, maintenance, and repairs all qualify.

You can’t deduct expenses for aspects of your house that have nothing to do with the business, such as a home gym or landscaping—unless, of course, you’re in the landscaping business, in which case you may have occasion to use your yard and garden as samples of your work.

Use the actual expense method calculation to determine the portion of allowable expenses you can deduct. For example, assuming your business use of your home is 15%, you can write off 15% of your mortgage interest, utilities, etc.

If you’re using the simplified method, the amount includes expenses. This method has pros and cons, and you’ll have to decide what works best for you. On the plus side, there is less of a record-keeping burden, but it may not always be the most advantageous way to go.

Your best bet is to do some math and see how it lands. The maximum you can deduct using the simplified method is $1500. You may be better off with the actual expense method if you have higher home expenses.

Things to Know About Home Office Deductions

No matter how much of your home you dedicate to business, one crucial thing to note is that you can’t claim deductions over and above your gross income. Despite not being a profitability requisite, you must show you’re in business. Otherwise, the IRS sees it as more of a hobby, meaning you wouldn’t be eligible for the deductions.

Keeping meticulous records is essential. You’ll need copies of home-related invoices and bills to calculate your expenses. If you use bookkeeping software, you can set up a rule that recognizes certain expenses as a split between personal and business, which will make tax time much simpler.

As always, if you have questions or are new to the home office deduction, speak to one of the qualified tax professionals at Tax Smart; we’re here to help!