If you use part of yourhome for business, you may be able to deduct expenses for the business use ofyour home. The home office deduction is available for homeowners and renters,and applies to all types of homes.
Simplified Option
This simplified optioncan significantly reduce the burden of record keeping by allowing a qualifiedtaxpayer to multiply a prescribed rate by the allowable square footage of theoffice in lieu of determining actual expenses.
Highlights of thesimplified option:
- Standard deduction of $5 per square foot of home used for business (maximum 300 square feet).
- Allowable home-related itemized deductions claimed in full on Schedule A. (For example: Mortgage interest, real estate taxes).
- No home depreciation deduction or later recapture of depreciation for the years the simplified option is used.
Regular Method
Taxpayers using theregular method, instead of the optional method, must determine the actualexpenses of their home office. These expenses may include mortgage interest,insurance, utilities, repairs, and depreciation.
Generally, when using theregular method, deductions for a home office are based on the percentage ofyour home devoted to business use. So, if you use a whole room or part of aroom for conducting your business, you need to figure out the percentage ofyour home devoted to your business activities.
Requirements to Claimthe Home Office Deduction
Regardless of the methodchosen, there are two basic requirements for your home to qualify as adeduction:
1. Regular and exclusiveuse.
2. Principal place ofyour business.
Regular and ExclusiveUse
You must regularly usepart of your home exclusively for conducting business. For example, if you usean extra room to run your business, you can take a home office
deduction for that extraroom.
Principal Place ofYour Business
You must show that youuse your home as your principal place of business. If you conduct business at alocation outside of your home, but also use your home substantially and regularlyto conduct business, you may qualify for a home office deduction.
For example, if you havein-person meetings with patients, clients, or customers in your home in thenormal course of your business, even though you also carry on business at anotherlocation, you can deduct your expenses for the part of your home used exclusivelyand regularly for business.
You can deduct expensesfor a separate free-standing structure, such as a studio, garage, or barn, ifyou use it exclusively and regularly for your business. The structure does nothave to be your principal place of business or the only place where you meetpatients, clients, or customers.
Generally, deductions fora home office are based on the percentage of your home devoted to business use.So, if you use a whole room or part of a room for conducting your business, youneed to figure out the percentage of your home devoted to your businessactivities.
Additional tests foremployee use. If you are an employeeand you use a part ofyour home for business, you may qualify for adeduction for its business use. Youmust meet the tests discussed aboveplus:
- Your business use must be for the convenience ofyour employer.
- You must not rent any part of your home to youremployer and use the rented portion to perform services as an employee for thatemployer.
If the use of the homeoffice is merely appropriate and helpful, you cannot deduct expenses for thebusiness use of your home.
Helpful hints
- If you include home depreciation as part of thehome office deduction and eventually sell your home at a profit, you will haveto pay a capital gains tax on the total amount of depreciation deductions youtook while you were living there, assuming you sold the home for a profit.
- Limit on write-offs – the law puts a cap on howmuch you can deduct for the business use of the home. Basically, your home officedeductions can’t exceed your home-based business income. In other words, homeoffice expenses can’t create a tax loss to shelter other income.
The bottom line
- The home office deduction is not a red flag foran IRS audit.
- Whether you qualify for this deduction isdetermined each year.
- Deducting a home office is treated differentlydepending on your business type.
- The simplified method can make it easier for youto claim the deduction but might not provide you with biggest deduction.