Every day, more people take the option of setting up their business office from home for convenience and lower costs. The IRS calls this the Home Office. However, the majority do not know or are not clear about what types of expenses and what amount they can deduct for the use of the Home Office, whether they are their own or the landlord's. In the following article we will help you find out what types of expenses you can deduct, who qualifies, and other information that will be very useful to prepare your tax return. Remember, as a business owner, you must know this vital information.
Do I qualify for the home office tax deduction?
According to IRS instructions, to qualify for the home office deduction, you must meet one of these criteria:
Exclusive and Regular Use: You must use a portion of your house, apartment, condominium, mobile home, boat or similar structure for your business on a regular basis. This also includes structures on your property, such as an unattached studio, barn, greenhouse or garage. It doesn't include any part of a taxpayer's property used exclusively as a hotel, motel, inn, or similar business.
Principal Place of Business: Your home office must be either the principal location of your business or a place where you regularly meet with customers or clients.
1.- Exclusive and Regular Use.
The biggest roadblock to qualifying for these deductions is that you must use a portion of your home exclusively and regularly for your business.
The law is clear and the IRS is serious about the exclusive-use requirement. Say you set aside a room in your home for a full-time business and you work in it ten hours a day, seven days a week. If you let your children use the office to do their homework, you violate the exclusive-use requirement and forfeit the chance for home office deductions.
The exclusive-use rule doesn't mean:
You're forbidden to make a personal phone call from the office.
You have to rush outside whenever a family member needs a moment of your time.
Although individual IRS auditors may be more or less strict on this point, some advisers say you meet the spirit of the exclusive-use test as long as personal activities invade the home office no more than they would be permitted to in an office building. The office can also be a section of a room and you can show that personal activities are excluded from the business section.
About the Regular Use, there's no specific definition of what constitutes regular use. Clearly, if you use an otherwise empty room only occasionally and its use is incidental to your business, you'd fail this test. If you work in the home office a few hours or so each day, however, you might pass. This test is applied to the facts and circumstances of each case the IRS challenges.
2.- Principal Place of Your Business.
You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.
For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business.
You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.
Generally, deductions for a 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, you need to figure out the percentage of your home devoted to your business activities.
If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.
Types of Expenses you can Deduct.
To determine the amount of expenses that you can deduct from taxes, there are two alternatives:
Simplified Option for Home Office Deduction
The simplified option uses a standard deduction of $5 per square foot of the portion of your home used for business, capped at 300 square feet, or $1,500.
If the Simplified Method is used to claim the deduction, the calculation is not based on actual expenses but by multiplying the square footage of the area used for business by the prescribed rate.
The rate is $5 per square foot of the part of the home used for business. The maximum footage allowed is 300 square feet. This means the most that can be deducted using the Simplified Method is $1500 per year.
The taxpayer may choose either the Simplified Method or the actual expense method for any tax year. Once a method is used for a specific tax year, it cannot be later changed to the other method for that same year.
The home office cannot be depreciated if the Simplified Method is used.
If the taxpayer uses more than one home with a qualified home office in the same year, the simplified method can be used for only one home in that year. However, they may use the simplified method for one and actual expenses for any others in that year.
If a home is used by more than one business, they may both use the simplified method but not for the same portion of the home.
The deduction for business use of the home can reduce the net profit of the business to $0 but not below $0, and if the Simplified Method is used the unused portion of the deduction, if any, cannot be carried forward to the following year.
The Regular Metod, which is more complicated, uses the percentage of your home used for business, including actual expenses, such as part of your mortgage interest, insurance, utilities, repairs and depreciation. The calculation happens on Form 8829.
The most exact way to calculate the business percentage of your house is to measure the square footage devoted to your home office as a percentage of the total area of your home. If the office measures 150 square feet, for example, and the total area of the house is 1,200 square feet, your business percentage would be 12.5%.
An easier calculation is acceptable if the rooms in your home are all about the same size. In that case, you can figure out the business percentage by dividing the number of rooms used in your business by the total number of rooms in the house.
You may qualify for the home office deduction if you use a portion of your home for your business on a regular basis. a home can include a house, apartment, condominium, mobile home, boat or similar structure.
Generally, your home office must be either the principal location of your business or a place where you regularly meet with customers or clients, and you usually must use the area exclusively for your business.
The rate for the simplified square footage calculation is $5 per square foot, with a maximum of 300 square feet.
If you care for children in a portion of your home, using that part of the house for personal activities the rest of the time typically allows you to still claim the business deduction.
If you're an employee working remotely rather than a business owner, you unfortunately don't qualify for the home office tax deduction (however some states do allow this tax deduction for employees).