The rules for benefiting from the home office deduction are complex, but this shouldn't discourage taxpayers entitled to the deduction from using it.
Who qualifies for the home office deduction?
For starters, there are only two types of work status that might qualify you for the deduction:
Working at home for the convenience of your employer. In order to qualify with this status, you’ll need to be able to prove that you aren’t just working at home because you want to. For example, if you have no workspace at your employer’s business location, that would strengthen your claim.
Note also that if you’re an employee working at home, you must take the home office deduction as a miscellaneous itemized deduction on schedule A. In this case your deduction is reduced by the 2% “floor” that applies to such deductions.
On the other hand, if you’re self-employed, you take the deduction using Form 8829, and the deduction is not reduced.
What qualifies as a home office?
A home office can be a room in your home, a portion of a room in your home, or a separate building near your home – a barn or garage, for example. However (and this is critical), the home office must be used for business on a regular and exclusive basis.
The IRS is strict about the definition of “exclusive.” If you use your living room as your office but also sometimes as a living room, you fail this requirement. But if you use one part of the room only for business (e.g. you have a desk area at one end of the room that is used for business only), the expenses associated with that portion of the room can be deducted, assuming you meet the other criteria.
“Regular” use is defined according to the specific facts and circumstances of your situation. Although the IRS may require you to prove that your use is regular, in some cases weekly use is sufficient to qualify.
Does the home office need to be the primary business location?
Surprisingly, the answer this question is no – but the home office does need to be your “principal” place of business as defined by the IRS. A home office can qualify as your principal place of business if it passes at least one of the following tests.
You do most of your administrative or managerial work in the home office, and it is the only fixed location where you do that kind of work.
- You meet with clients, patients, customers there on a regular basis.
- The home office is a separate structure, use regularly and exclusively for that purpose.
What can I deduct if I have a home office?
Generally speaking, you are limited to deducting a total amount does not exceed your gross business income.
Expenses that apply specifically to your home office – the cost of a business phone line, for example – can be deducted. You may also deduct the business portion of the indirect expenses associated with your home. For example, suppose that your office occupies 10% of your home’s total area. If you rent your home, you could deduct 10% of the rent; if you own your home, you can deduct 10% of the mortgage interest, property insurance, and real estate taxes as home office expenses. In either case, a similar proportion of the cost of utilities is deductible, as well as costs of repairs, painting, etc., that apply to your home office.
If you own your home, you’re also entitled to take depreciation on the home office portion. This could complicate your tax filing work, but that’s an unavoidable consequence of the deduction.
What other considerations should I keep in mind?
If you opt to take the home office deduction, be extremely careful and keep good records on any expenses you hope to deduct. Be ready to offer proof to the IRS that your home office meets the rules.
Because the home office deduction can be complex, it could be worthwhile to hire an accountant to prepare your taxes. Using tax software is not always the best approach when you’re filing a self-employed tax return. Unless you understand the tax code very well, the software may still allow you to make a filing error.
Also, be aware that if you own your home, taking the home office deduction will probably reduce your ability to exclude some of the capital gains realized when you sell your house. Even if you don’t take the depreciation deduction, the amount that you were entitled to take will not qualify for the capital gains tax exclusion.
Once again, be sure that you obtain professional tax advice if you don’t have a good understanding of the tax code. IRS publication 587 (Business Use of Your Home) is a good start, but tax professional can guide you through all the issues that pertain to your specific situation.