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With all the modern times facilities, working from home has become more and more popular and frequent, and not just for the self-employed.
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But a most remarkable fact about the home office deduction is how many entitled taxpayers do not claim it for fear of triggering a tax audit.
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But the same circumstances that have enabled more and more people to work from home, are exactly the reason you should fear this deduction no more, and that is easy and unrestricted access to information, including our weekly newsletters. Even the IRS has taken steps to make this deduction simpler and more appealing by introducing a simplified method of calculating it.
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- All this being said, let’s take a quick view of this deduction and clarify what precisely can enable you to deduct expenses for the business use of your home.
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First of all, there are two basic requirements for your home office to qualify as a deduction:
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1. Regular and Exclusive Use.
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You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.
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2. Principal Place of Your Business.
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| You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business. You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers. |
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Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.
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There are some additional tests if you are an employee who uses part of your homes for business:
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- Your business use must be for the convenience of your employer, and
- You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.
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| If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home. |
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Deductible expenses for business use of your home include the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs. In general, you may not deduct expenses for lawn care or for painting a room not used for business.
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As mentioned earlier, there are two methods you can use to figure the amount of your home office deduction.
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| Regular Method - Historically, taxpayers have computed the business use of home deduction by allocating the total expenses of the home to the percentage of the home floor space used for business. However, a qualified daycare provider who does not use his or her home exclusively for business purposes must figure the percentage based on the amount of time the applicable portion of the home is used for business. |
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| Simplified Option - While you can still figure the deduction using the regular method, many of you may find the optional safe harbor method less burdensome. Beginning in 2013, Revenue Procedure 2013-13 allows qualifying taxpayers to use a prescribed rate of $5 per square foot of the portion of the home used for business (up to a maximum of 300 square feet) to compute the business use of home deduction. |
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Under this safe harbor method, depreciation is treated as zero and you can claim the deduction directly on Form 1040, Schedule C. Instead of using Form 8829, you indicate your election to use the safe harbor option by making two entries directly on the Schedule C for the square footage of the home and the square footage of the office.
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| Deductions attributable to the home that are otherwise allowable without regard to business use (such as qualified residence interest, property taxes, and casualty losses) are allowed in full on Form 1040, Schedule A (PDF), Itemized Deductions. |
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| You may choose to use either the simplified method or the regular method for any taxable year. You choose a method by using that method on your timely filed, original federal income tax return for the taxable year. |
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Once you have chosen a method for a taxable year, you cannot later change to the other method for that same year.
If you use the simplified method for one year and use the regular method for any subsequent year, you must calculate the depreciation deduction for the subsequent year using the appropriate optional depreciation table. This is true regardless of whether you used an optional depreciation table for the first year the property was used in business. |
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| Regardless of the method used to compute the deduction, you may not deduct business expenses in excess of the gross income limitation. Under the regular method for computing the deduction, you may be able to carry forward some of these business expenses to the next year, subject to the gross income limitation for that year. There is no carryover provision under the safe harbor method, but you may elect into and out of the safe harbor method in any given year. |
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We have also used a “simplified method” to summarize the most important features of this deduction, but things are never as simple as they seem with all the IRS rules and exceptions to the rules.
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| Therefore, the “method” we always recommend is that you use a tax professional who will make sure you take all the tax credits and deductions you are entitled to. |
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