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Whether self-employed, an employee, or a partner, you may be able to deduct certain expenses for the part of your home that you use for business.
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Even though an increasingly higher percentage of the workforce are telecommuters, only a few benefit from the home office deduction, mainly, it seems, for fear that the write-offs would trigger a tax audit.
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There is no reason to fear an audit, as long as all the rules are met. All you need to do is go on reading and see if you qualify for this potentially substantial tax deduction.
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- To deduct expenses for the business use of your home, you must use part of your home as one of the following:
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- Exclusively and regularly as your principal place of business for your trade or business;
- Exclusively and regularly as a place where you meet and deal with your patients, clients, or customers in the normal course of your trade or business;
- A separate structure that's not attached to your home used exclusively and regularly in connection with your trade or business;
- On a regular basis for storage of inventory or product samples used in your trade or business of selling products at retail or wholesale;
- For rental use; or
- As a daycare facility.
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Additional tests apply for employee use. If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use if you meet the tests mentioned above plus:
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- Your business use must be for the convenience of your employer, and
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- 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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The term “home” includes a house, apartment, condominium, mobile home, boat, or similar property which provides basic living accommodations. It also includes structures on the property, such as an unattached garage, studio, barn, or greenhouse. However, it does not include any part of your property used exclusively as a hotel, motel, inn, or similar establishment.
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If the exclusive use requirement applies, you cannot deduct business expenses for any part of your home that you use both for personal and business purposes. For example, if you're an attorney and use the den of your home to write legal briefs and for personal purposes, you may not deduct any business use of your home expenses.
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Further, under the principal place of business test, you must determine that your home is the principal place of your trade or business after considering where you perform your most important business activities and where you spend most of your business activity time, in order to deduct expenses for the business use of your home.
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A portion of your home may qualify as your principal place of business if you use it for the administrative or management activities of your trade or business and have no other fixed location where you conduct substantial administrative or management activities for that trade or business.
An employee may only deduct business use of the home expenses when he or she uses the business part of the home exclusively and regularly and for the employer's convenience. |
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You also may take deductions for business storage purposes when the dwelling unit is the sole fixed location of the business or for regular use of a residence for the provision of daycare services; exclusive use isn't required in these cases.
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| If, for instance, you are a plumber or an interior decorator and spend most of your time in other people’s homes, you can still write off a home office if you use it for administrative purposes, such as to invoice clients, keep the business’ books, order supplies, and so on. |
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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. |
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| In general, you may not deduct expenses for the parts of your home not used for business, for example, lawn care or painting a room not used for business. |
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After having determined that you qualify for the deduction, you can begin to figure how much you can deduct and whether to use the actual expenses or a simplified method.
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The Regular Method
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| When using the regular method (required for tax years 2012 and prior) you must determine the actual expenses of your home office. |
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| You compute the business use of home deduction by dividing expenses of operating the home between personal and business use. |
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You may deduct direct business expenses in full, and may allocate the indirect total expenses of the home to the percentage of the home floor space used for business.
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A qualified daycare provider who doesn't use his or her home exclusively for business purposes, however, must figure the percentage based on the amount of time the applicable portion of the home is used for business.
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The Simplified Option
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| Many of you may find the optional safe harbor method less burdensome. Under this method, you multiply the allowable square footage of your office by a prescribed rate of $5. The maximum footage allowed is 300 square feet. The deduction limit using this method is $1,500 per year. |
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| With this method, depreciation is treated as zero and you can claim the deduction directly on Form 1040, Schedule C. Instead of using Form 8829, Expenses for Business Use of Your Home, you can 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, Itemized Deductions.
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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. If your gross income from the business use of your home is less than your expenses, the deduction for some expenses may be limited. |
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| 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's 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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Self-employed individuals claim the home office deduction on Schedule C Line 30, farmers claim it on Schedule F Line 32, and eligible employees claim it on Schedule A Line 21.
Though homeowners using the simplified option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method. |
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You should also remember that many expenses related to your business are deductible even if you don't have a home office. These expenses fall into two major categories: business expenses and homeowner's deductions and are allowed as itemized deductions on Schedule A.
Costs that are business or job related expenses (ordinary, necessary and reasonable) are deductible even if you don't qualify for the home office deduction. For example, office supplies, postage, and the cost of bringing a second telephone line into your home for business use may be deductible. In addition, you may be able to depreciate (or expense) the cost of computers and office furniture you buy to use at home, even if you're not allowed to deduct the cost of the office itself. |
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If you are entitled to claim itemized deductions for expenses related to your home, you can claim those without regard the home office deduction (for example, home mortgage interest and real estate taxes would be allowed as an itemized deduction on Schedule A of your tax return in any case).
The advantage of the home office deduction is that the portion of these expenses that relate to the home office can be deducted as business expenses in arriving at your gross income, which provides a more substantial tax break. |
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You can find further details on the home office deduction and the two options in Publication 587, Business Use of Your Home, posted on the IRS website.
To make sure you follow all the IRS rules and regulations for the home office deduction, as well as for all your dealings with the IRS, you should enroll help from a tax professional. |
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