If you regularly work from home, you may be able to take advantage of a deduction for the business use of your personal residence. The home office deduction, however, has some specific requirements you should be aware of before claiming it on your tax return.
Do I Qualify?
In order to qualify, there are generally some basic requirements must be met.
- The part of your home used to calculate the home office deduction must be used regularly and exclusively for business. In other words, the space must generally be used exclusively as your office, and not a kitchen table that you work at from time to time. However, there are two exceptions. If you run a daycare facility from your home or store inventory or product samples there, you don’t have to meet the “exclusive use” test.
- The office must either be your principal place of business or a space where you meet clients or customers. Part of your home may qualify as your principal place of business if you conduct administrative or management activities there, as opposed to running your company entirely from another location. The office doesn’t even have to be the only one, as long as you don’t conduct “substantial administrative or management activities” somewhere else.
Your principal residence does not have to be a home that you own. As long as you meet the other requirements for a home office deduction, you can still utilize the home office deduction for a rented home or apartment.
How is the Deduction Calculated?
There are two ways to calculate the home office deduction, using either the simplified or traditional methods.
- Under the simplified method, the deduction is based on the square footage of the home office at a standard rate prescribed by the IRS. For 2016, the rate is $5 per square foot, up to a maximum office size of 300 square feet, resulting in a maximum possible deduction of $1,500.
- The traditional method of calculating the home office deduction begins with adding up the actual expenses you incurred throughout the year. This includes any money you spent maintaining the office itself, as well as a proportional share of the entire home’s expenses, including but not limited to:
- Mortgage interest
- Rent
- Homeowners’ insurance
- Property taxes
- Utilities (electric, water, gas, sewer, garbage)
- Pest control services
- Whole-home repairs (a new roof, for example)
- Depreciation
Any direct expenses associated with the office space (i.e., repairs directly to the office space) would be deducted in full, as opposed to the indirect expenses listed above, which are allowed on a proportional basis.
It’s important to calculate the deduction under both methods to determine the most advantageous deduction. Depending on the circumstances, one method may provide you a higher deduction than the other method, and this should be reviewed on an annual basis.
Employees may also qualify for the home office deduction. They must either use the space for the company’s convenience, not merely their own, or rent the area used for work to their employer. Since the deduction for employees is reported as an unreimbursed job expense on Line 21 of Schedule A, it’s subject to the 2% of Adjusted Gross Income (AGI) threshold. However, it should be noted that employees cannot utilize the safe harbor method when claiming the home office deduction, should they otherwise qualify, if they receive advances, allowances, or reimbursements for expenses related to the use of a portion of their home as a home office.
Small business owners who qualify for the home office deduction can claim the home office deduction on Line 30 of Schedule C upon filing form 8829.
With either method, you cannot take a home office deduction if it would cause your business to operate at a loss. You can deduct home office expenses up to your net income (revenues less expenses) and carry over the remainder, if any, to the following year.
Getting Creative
In a recent decision, the Tax Court agreed with the IRS that a taxpayer’s “mobile office” deductions for a motor home that was used partially for business purposes should be limited to less than what was originally claimed on his tax return.
The news isn’t that the taxpayer’s deductions were limited to less than what was originally claimed, but that a space utilized for both personal use and business use was allowed as a deduction. Therefore, be imaginative with the spaces you feel may qualify, as long as the deduction is legitimate. As tax advisors, we’ve counseled countless clients about the ins and outs of home office deductions.
Let us know how we can help you; contact me at mhermes@zinnerco.com or any of our professionals. You may not get to deduct the PJs, but we’re happy to start the conversation over coffee with you.
