If you work from home (a house, condo, apartment or boat), you may be able to claim the home office deduction. If certain requirements are met, this deduction is available to both self-employed individuals and employees. In order to qualify, (1) the area used as a home office must be used, regularly and exclusively, for your business and (2) the business portion of the home must be either your principal place of business or where you meet or deal with patients, clients or customers in the normal course of business (therefore, if you do meet with clients at your home office, keep a log listing which clients you met with on which days).
The "regularly and exclusively" requirement is probably the biggest barrier to using the deduction. The area used as an office is usually a separate room or, if the division is clear, a section of a room may qualify. The most important point is that personal activities must be excluded from the business section. For example, an attorney who uses a room in her home 10 hours a day, 7 days a week as an office will not be able to claim the home office deduction if her children are allowed to do their homework in that room.
Nevertheless, there are two exceptions to exclusive use. The exclusive use test does not have to be met if you use part of your home to store inventory or product samples or as a daycare facility. To read more about these uses, take a look at IRS Publication 587.
This deduction is easier for self-employed individuals to claims than for employees because an employee's use of a home office must also be for the convenience of his or her employer. For example, if the employer does not provide an employee with a work space at the employer's location, the employee may be entitled to a deduction for maintaining a home office. If office space is provided by the employer and the employee also choose to work from home, the home office is not considered for the convince of the employer. Furthermore, the employee cannot rent any part of his or her home to the employer and then use the rented portion to perform services for the employer.
If your use of a home office qualifies, some of the expenses that you are entitled to deduct include (1) a portion of your real estate taxes, (2) deductible mortgage interest (be careful not claim this interest twice), (3) rent, (4) utilities, (5) homeowner's or renter's insurance, (6) depreciation of your home and (7) painting and repairs (not permanent improvements). If you make permanent improvements to your home, the value of these improvements is added to your basis in the home and can be recovered through depreciation. If you choose to depreciate your home office, there may be consequences when you decide to sell the home.
In order to calculate the deductible amount, determine the percentage of your home used for business and apply that percentage to the deductible expenses. For example, if the total area of your home is 2,000 square feet and your office is 200 square feet, the business percentage is 10%.
If you are self-employed, you would use form 8829 to figure out your home office deduction and would report the deduction on your schedule C.
Employees, on the other hand, would claim these costs as miscellaneous itemized deductions on their schedule A and these expenses must exceed 2% of the employee's adjusted gross income before they can be deducted. Therefore, if you earn $60,000 per year, the first $1,200 of your expenses cannot be deducted. If your total eligible deductions are $12,000 and your business percentage is 10%, that means you are left with no deduction.
Finally, it is worth mentioning that the home office deduction has been subject to scrutiny because many believe that taking the deduction could trigger an audit. This is most likely no longer the case as a result of changes made in the late 1990s. Nevertheless, there is a lot of potential for abuse with this deduction, so it is important to keep proper records to back up this deduction in the event that you are audited. You should use this deduction if you are entitled to it and can prove it in case of an audit.
For more information on claiming the home office deduction or for answers to your specific questions, take a look at IRS Publication 587.
This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.
Well written, but I think claiming this deduction may be the worst thing a taxpayer can do and the benefits are SO small (and I do think it's a red flag for an audit). So you can deduct a portion of the mortgage interest and real estate taxes (the biggies). So what? You deduct those anyway. The depreciation deduction is very small (say 10% of the improvements over, I think, 37.5 years?). The only real benefit is deducting say 10% of your utility bill. Woopdie do. Then when you sell the house at a profit (those days will come again) 10% doesn't qualify for favorable tax treatment. I say: don't take it!
ReplyDeleteThank you for your comment, Larry. This is a very controversial tax deduction and clients must be aware of this when they decide whether to take it. Whether this deduction is a red flag is disputable. Those taxpayers who file a schedule C (or a schedule A), on the other hand, are at a much higher risk of audit (with or without a home office deduction) than those who do not. Therefore, clients should be advised to keep good records for ALL the deductions that they choose to claim on their schedules C and A. Whether or not to claim a home office deduction should be up to the client. They should be aware of their potential tax savings and consequences and should make the final decision regarding which deductions they want to claim. This deduction can be beneficial for some taxpayers and not for others. For example, a taxpayer renting a 910 square-foot two bedroom apartment and using the 120 square-foot bedroom as an office can claim 13% of his rent, utilities and renter's insurance. Assuming that he pays $20,000 for these expenses, he can claim $2,600 for his home office deduction.
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