The Home Office Deduction [a detailed review]

If you use part of your home for your business, you may qualify to deduct the expenses incurred for the business use of your home, including a home office. This deduction is for business owners regardless of whether they rent or own their home.

If you work from home for your employer, you do not qualify for this deduction. The home office deduction and job expenses for employees were eliminated under the tax reform in 2018. To qualify for the home office deduction, you must be self-employed and use a dedicated space in your home as your home office.

Requirements to Qualify for the Home Office Deduction

To qualify for the home office deduction, you must meet these two requirements:

  1. Regular and exclusive use; and
  2. Principal place of your business.

Regular and Exclusive Use. You must use that part of your home regularly and exclusively for your business to qualify for the home office deduction. For example, if you use an extra room or other dedicated space in your home as your home office on a regular basis, it would meet these requirements.

Exclusive use does not mean you cannot use the office for personal reasons. However, personal use of your home office should be limited, if you want to deduct expenses for its use.

The IRS does not define regular use. If the IRS challenges your use, the IRS applies the test to the facts and circumstances of your case. If you work in your home office on a consistent basis, even if it's a few hours a day, you should pass this test.

Principal Place of Your Business. You must be able to show that you use your home as your principal place of business. It does not need to be the only place you conduct business. You could meet clients or customers at their homes or other locations. You can have another office or business location. However, you must show you use your home substantially and regularly to conduct business. For example, if you use your home office to manage and complete administrative tasks for your business, you should pass this test. If you only use your home for business because it is convenient, you will not qualify for the home office deduction.

If you use a separate free-standing structure on your property, such as a studio, barn, or garage, you do not have to meet this principal place of business test, as long as you pass the regular and exclusive use test.

Simplified Option vs. Regular Method

Taxpayers are allowed to choose between two methods to calculate the home office deduction, either the simplified option or the regular method. The regular method requires you to keep track of actual expenses. This can be burdensome for small business owners, as it requires making complex calculations and allocations. Starting for taxes filed in 2014 for the 2013 tax year, you are allowed to choose the simplified option that is a prescribed rate based on the allowable square footage of your home office.

If you elect to use the regular method, you must determine the percentage of your home used for your home office and devoted to your business activities. Then you must calculate the percentage of your allowable expenses such as: mortgage interest, insurance, utilities, repairs, and depreciation.

Keeping track of all the actual expenses and making the calculations and correct allocations is no easy task. However, for some taxpayers, who have expensive home office expenses, such as: a dedicated phone line, etc., it may be worth the effort to track office expenses separately. However, for the majority of taxpayers the simplified option will be the easy way to receive credit on their tax return for home office expenses.

The Bottom Line

To qualify for the home office deduction, you must be self-employed and use a devoted space either inside your home or on your property principally, regularly, and exclusively to conduct your business unless you qualify for one of the exceptions. If you meet these requirements, you can choose to either deduct your home business expenses by deducting your actual expenses or using the simplified method.

If you are not sure if you qualify for the home office deduction or need assistance determine which calculation method will add up to the largest deduction for you, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.

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