New tax clients ask me all the time about taking a home office deduction. It’s is a popular idea, but it doesn’t work for everyone, even if you have your own business. Lots of rules and your exact circumstances dictate what you can do. It can be pretty confusing.
So let’s “un-confuse” it: When can you take a deduction and how much?
When can you take a home office deduction?
1. Exclusive and Regular Use: Space used for a home office must be used exclusively and regularly for business operations. No non-business activity can be conducted in the home office. That means no personal items in the home office.
2. Principal Place of Business: Your home must be used to substantially and regularly conduct your business. It’s okay if you also carry on business at another location, but your primary activities must be in your home office.
3. Employees: Wage earners may be able to deduct a home office if #1 and #2 apply AND it’s for the employer’s convenience, such as teleworking to reduce the employer’s real estate footprint.
What home expenses can be deducted?
4. Indirect Expenses: Expenses for keeping up and running the entire home, such as insurance, utilities, and general repairs are deductible based on the Business Use Percentage. A percentage of mortgage interest and real estate taxes can also be deducted.
5. Business Use Percentage: The business percentage equals the area of the home used for business divided by the total area. The most common method to calculate the percentage is dividing the square footage used exclusively for business by total square footage. Shared spaces, like hallways, cannot be included in office space.
6. Direct Expenses: Expenses that benefit only the area exclusively used for business, such as painting or repairs in the home office, are direct expenses that are fully deductible.
7. Unrelated Expenses: Expenses for the part of the home not used for business, such as lawn care or painting a room not used for business, are not deductible.
8. Simplified Option: A standard deduction is allowed of $5 per square foot used exclusively for business, limited to 300 square feet.
Qualifying for a home office deduction can really help reduce your tax liability, especially for business owners. The basic rules are outlined above. More rules are more on the IRS website. Check them out here.