The home office deduction has been a hot topic recently with many more workers and entrepreneurs working from home. Setting up home offices can improve productivity and work-life balance but can it also get you a bigger tax refund? If you work from home, you may be eligible for a home office deduction. In this article, I’ll explain what the home office deduction is, who qualifies for it, and how to claim it.
What is the Home Office Deduction?
The tax code generally prohibits you from deducting business expenses associated with your primary residence. However, under IRC 280A taxpayers may deduct business expenses if the space meets the criteria for the home office deduction.
The home office deduction allows taxpayers who work from home to deduct certain direct and indirect expenses related to their home office on their tax return. For example, these expenses may include things like rent, utilities, repairs and even depreciation. If you’re self employed, this deduction helps you offset the costs associated with running a business out of your home.
How to Qualify For The Home Office Deduction?
To qualify for the home office deduction, you must meet the following criteria:
- Regular and Exclusive Use: You must use a specific area of your home exclusively and regularly for business purposes. On the contrary, having a room that you use as your home office and for gaming will not cut it.
- Principal Place of Business: Your home office must be your principal place of business. In other words, it must be where you conduct most of your business. You won’t qualify if you rent out office space where you conduct most of your business.
- Self-Employed: You must be self-employed to claim the deduction. However, if you are an employee who works are your house you cannot claim the home office deduction.
How to Claim the Home Office Deduction
There are two ways to claim the deduction. We can do this the easy way… or the hard way.
The easiest way to claim the deduction is by using the simplified method. To illustrate, simply multiply the amount of square feet you use for business purposes by $5 per square feet to get your deduction. However, the overall limit is $1,500 so you won’t get a benefit for anything larger than 300 square feet.
The pros of using the simplified method is that it’s a simplified method. The cons of using the method is that you’ll be limited to $1,500. Additionally, if your business has an overall loss you cannot claim the deduction and the amount doesn’t carry forward to future years.
To use the regular method to claim this deduction, you must file IRS Form 8829, Expenses for Business Use of Your Home, with your tax return. This form will help you calculate your home office deduction based on your actual expenses. These expenses may be in excess of $1,500 and if the business has an overall loss you can carry forward the disallowed deductions to future years.
When claiming the home office deduction it’s important to separate all your direct and indirect expenses. You will be able to deduct 100% of the direct expenses but your indirect expenses will be limited by the percentage of square feet your home office is compared to your entire home. For example, if your home office is 20% of your apartment then you can only deduct 20% of your indirect cost.
Some examples of direct expenses are:
- New carpet in home office
- Painting walls of home office
- Purchase of furniture and equipment for home office
Some examples of indirect expenses include
- Mortgage interest
- Utilities (including home internet)
- Real estate taxes
The IRS will target small business owners that try to abuse this deduction. If you keep keep complete records of your expenses, including receipts and invoices, you will be bullet proof from an IRS audit. Lastly, You should also be prepared to provide documentation that proves your home office is used regularly and exclusively for business purposes.
Home Office Deduction Eligibility – Summary
The home office deduction can be a valuable tax break for anyone running a business out of their home. To qualify for the deduction, you must meet certain criteria that I went over in this article. Remember, If you qualify, be sure to keep accurate records of your expenses. Lastly, make sure to consult with a tax professional to ensure you are not missing out on the home office deduction or other tax deductions for the remote worker.