If you work from home you may qualify for the Home-Office Deduction. There are different for employees than for self-employed workers. If you work at home for the convenience of your employer then you may qualify for the home office deduction. For this post let’s focus on people who are self-employed because a tax deduction for your business will save you income tax as well as self-employment tax.
Does it benefit you?
If you do qualify for the home-office deduction the number one benefit is the ability to deduct expenses you already incur but are not providing you a tax benefit. Another big benefit of having a home office is your very short commute. Not only is it convenient for you but it also makes your business travel from your home deductible. You can get a tax deduction for the business miles you drive from your home to appointments or meetings. If you work in an office away from your home then your travel to the office even if it’s many miles away are just personal expenses that you can’t deduct. The other benefits of a qualified home office are deductions for expenses some of the expenses you pay for your home. For example:
- Mortgage interest
- Real estate taxes
- Insurance
- Utilities
- Some repair and maintenance cost
Are of these all examples of costs you can deduct as business expenses, but you can’t deduct the total amount you spend. For most of these expenses, you can only deduct the part of them in the same ratio of the amount of space your home office uses in your home compared to the total size of your home. Are you already asking yourself if it is even worth it to track all of this? Don’t stop yet because there is a simplified method too.
What’s the catch?
At one time the home-office deduction was thought by some taxpayers to call attention to your tax return like a “red flag”. I don’t think you should be afraid to claim a deduction that you are qualified to take. Make sure you understand the rules and you need to document your facts. You need to consult your tax preparer to make sure your specific situation qualifies. In 2013 new rules came out from the IRS to create a simplified method of claiming this deduction, but that only applies to how you calculate the amount. You still have to qualify as haveing a home-office to claim the deduction. You must have a dedicated office space. That doesn’t mean it has to be a separate room, but it must be a space exclusively used for your business. So you can’t claim your dining room table as exclusively used as an office if you still use it for meals.
Are you simple?
There are two ways to calculate your deduction. But no matter which way you choose you still have to qualify. Let’s look at the specific qualification according to IRS publication 587.
- Your home office must be used exclusively and regularly.
- You must regularly meet or deal with clients or customers in the normal course of your business at your home.
- Or if you don’t meet people at your home then it needs to be your “Principle Place of Business” which means you don’t have another regular location where you do your administrative activities.
- If you run a daycare there are some other rules we won’t cover here.
Now that you think you qualify lets talk about how much you can deduct. First, the simplified method. The simplified method allows you to take the exclusively used square footage up to a maximum of 300 square feet and multiply that space by the prescribed rate which is $5 per square foot. Before you skip past the simplified method, one other factor you should consider is the potential impact on your taxes of selling your home after deducting depreciation expense for using part of your home in your business. That is complicated so again you need to consult your tax advisor.
You love the details!
If you use more 300 square feet of space exclusively as your home office then you should look at the regular calculation. But even if you use less this method could be more advantageous to your taxes. How do you calculate the regular method?
- You have to know the square footage of your regular and exclusively used space let’s assume 250 sq. feet.
- You have to know the total square footage of your home let’s assume 2,500 sq. feet.
- Then divide your Home Office by the total (250 / 2500 = 10%)
- Next you need to divide your expenses into two categories the direct and indirect expense.
Direct expenses are those that are only an expense because of your business like painting the walls or putting in new flooring in your home office. You can deduct 100% of these expenses. Indirect expenses are expenses that benefit the whole house like your utilities. In our example, you can deduct 10% of the indirect expenses with some limitations. Your mortgage and real estate taxes are handled separately from other indirect expenses and the personal portion of these expenses can usually be deducted as itemized deductions.
Is your home-office a tax deduction?
A home-office deduction is a good way for you to save on both your income taxes and self-employment taxes. And if you use the simplified method the record keeping is pretty simple. Do you drive a lot of business miles? The best part may be the ability to claim more business mileage by having a qualified home office. Let’s review the rules:
- Your home-office must be exclusively used. It doesn’t have to be a whole room but it has to be a defined area. For example, a desk that isn’t used for any personal activities like the kids homework.
- Your home-office must be regularly used for your business. You don’t have to use it every day but you need to have regular business functions you do in this office location.
- If your clients or customers don’t meet you in your home office then it needs to be a place where you do your administrative activities like billing or bookkeeping because you don’t have another regular location to do these activities.
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