Tax Laws for Writing Off Your Home Office

Before writing off your home office, make sure to read up on the lengthy list of qualifications required by the IRS.

Before writing off your home office, make sure to read up on the lengthy list of qualifications required by the IRS.

With the number of home offices exploding (an article in Forbes estimates that more than 3 million workers can make the claim), the IRS created a simplified filing process for taxpayers looking for a home office deduction this year.

To figure out the deduction under the the “Safe Harbor” method, the qualifying homeowner simply needs to multiply the square footage of the area of the home devoted to the home office by the prescribed rate of $5 per square foot.

Of course, to qualify, there are several criterion homeowners need to meet. As you can imagine, there are a lot of rules surrounding deducting expenses related to a home office and not following them to the letter can result in tax penalties down the road should you ever be the subject of an audit. We’ll give you an overview of what you need to know starting with a quick quiz, and but be sure to read over IRS Publication 587 for all the details.

Can I Deduct Business Use of the Home Expenses?

Determine if you qualify for deductions related to using your home for business-related functions. This quiz does not include use of the home for storage of inventory or product samples or the use of your home as a daycare facility.

1. Is part of your home used in connection with a trade or business? If your answer is yes, go to the next question. If your answer is no, there is no deduction.
2. Are you an employee?
If your answer is yes, go to the next question. If your answer is no, go to No. 5.
3. Do you work at home for the convenience of your employer?
If your answer is yes, go to the next question. If your answer is no, there is no deduction.
4. Do you rent part of your home used for business to your employer? If your answer is yes, there is no deduction. If your answer is no, go to the next question.
5. Is the use regular and exclusive?
If your answer is yes, go to the next question. If your answer is no, there is no deduction.
6. Is it your principal place of business?
If your answer is yes, a deduction is allowed. If your answer is no, go to the next question.
7. Do you meet patients, clients or customers in your home?
If your answer is yes, a deduction is allowed. If your answer is no, go to the next question.
8. Is it a separate structure?
If your answer is no, there is no deduction. If your answer is yes, a deduction is allowed.

Definitions

Of course, this is the IRS we’re dealing with here, so there is a veritable encyclopedia on the definitions for specific terms like “regular and exclusive” and “principal place of business” to read over to make sure you’re applying the correct rules to your tax filing.

Exclusive Use:
For a home office to qualify under the “Exclusive Use” test, a specific area of your home (whether it’s a room, outbuilding or some other identifiable space) must be used solely for your business. If your spare bedroom doubles as the place you prepare client’s tax returns and a playroom, it doesn’t count under “exclusive use.”

Exceptions include:

  • Regularly using a portion of your home for storing inventory or product samples.
  • Using your home as a daycare facility.

Principal Place of Business:
Many companies have multiple locations at which business is conducted. For your home to qualify as a deduction under the Principal Place of Business test, it must meet the following criterion:

  • It is used exclusively and regularly for management and administrative activities related to your business.
  • There is no other fixed location where you conduct management or administrative activities.

Management and administrative activities include:

  • Billing customers, clients or patients
  • Keeping books and records
  • Ordering supplies
  • Setting up appointments
  • Forwarding orders or writing reports

Exceptions
There is plenty of nuance to IRS definitions, so you’ll find exceptions and gray areas when trying to figure out whether your home office qualifies. Here are some common ones:

  • Your home office can be used for more than one business, but it just can’t be used for mixed business and personal use.
  • Separate structures (like a detached garage you’ve converted into an office) don’t need to be the principal place of business to qualify for deductions, unlike an office inside your house.
  • Not all of your work must be completed within your home office necessarily. If you’re a salesperson, for instance, you probably spend most of your time out of the office, but if you perform functions like billing and returning client phone calls from your home office, it should still qualify.
  • Even if some administrative and management functions are performed elsewhere, you might still qualify for deductions. Examples include hiring others to perform administrative and management duties outside of your home (like hiring a company to handle billing), you conduct administrative and management duties at non-fixed locations like a hotel room or car, or you sometimes conduct administrative or management duties at a fixed location outside your home.

Do the math

After you’ve figured out if your home office does, in fact, qualify for a deduction, then you’ll need to crunch numbers.

You can use the Safe Harbor formula described above, or opt for the more complicated, conventional method (which allows you to make a deduction for the depreciation of allocated office space. To learn more about that process, either work with a tax professional or take the DIY approach with the help of IRS Publication 946.

Using the traditional method, your deduction will be based on the percentage of your home the home office occupies. To determine this, just divide the square footage of your home office by the square footage. Then you can apply that percentage to different expenses.

Qualifying expenses include:

  • Home repairs or maintenance
  • Mortgage interest
  • Real estate taxes
  • Utilities
  • Homeowners insurance premiums

Office supplies, furniture and equipment can also qualify for deductions. Make sure to save bills and canceled checks in the chance that you’re audited and you need to prove what you spent to the IRS. For the safest approach work with a CPA. Anyone can get audited and it’s always wise to have a pro in your corner.

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