IRS Home Office Tax Deduction – Rules & Calculator
If you own a small business or do freelance work from home, you can get a nice self-employment tax break by using the home office deduction.
Simply put, the home office deduction allows you to deduct a portion of the cost of running your home as a business expense, proportional to the amount of your home you use for business. You can also take this deduction if you have been asked to work at home by your employer.
This can save you a lot of money if done properly – but you need to be careful, as it is one of the most commonly abused tax deductions.
Home Office Deduction
1. How Does the IRS Define a Home Office?
Conduct business in an RV, houseboat, or missile silo? Or maybe a converted garage that you use as an office? That won’t make the IRS bat an eye. But they’re quite strict on the two requirements that define whether your home office qualifies for the tax deduction.
You must use the area regularly and exclusively for a trade or business.
You must be able to show that you use the area as your principal place of business, or meet clients or customers there.
2. What Does It Mean to Use the Area Regularly and Exclusively?
This means that your office computer isn’t the same computer your kids play games on. You can’t throw parties (unless they’re work-related) in your office, and you must use the space on a regular basis. Having a client conference in your spare room once a year doesn’t allow it to be qualified as a home office. However, you can also delineate one area of a room as your “office,” as long as it is separated and isn’t used with the rest of the room. So if your desk is in the corner of a common area, you might put up screens or bookcases to show that it is a separated area.
3. What Can You Deduct Using the Home Office Deduction?
Any home-connected expense such as utilities, rent or mortgage, homeowners insurance, or necessary repairs can be counted. Home improvements that benefit the entire home can be deducted proportionally, but repairs that specifically benefit the office can be deducted in full. Keep in mind that even if you don’t qualify to take the home office deduction, home-connected expenses such as a telephone landline or cell phone plan that is used exclusively for business can still be deducted in full.
In tax year 2013, the IRS started offering a simplified option to claim the home business office deduction. Instead of filling out the lengthy Form 8829 and claiming individual expenses, taxpayers can fill out a new streamlined version in which the home office deduction is simply based on the number of square feet of office space. In 2015, home business owners can claim $5 per square foot for their office space up to 300 square feet.
Business owners who opt to use the simplified version cannot claim a depreciation deduction for their home or later recapture depreciation for the years they used the simplified option.
How to Calculate
If you opt for the regular method instead of the simplified option, the first step is to determine what percentage of your home your office takes up, in terms of square footage. If your home is 1,000 square feet, and your office is 10 feet by 10 feet, your office is 100 square feet and thus encompasses 10% of your home. If you don’t know the square footage of your house, you should check with your local county auditor to see if they have the information on file for your property. Alternately, if all the rooms in your house are roughly the same size, you can divide the number of rooms you use for business by the total number of rooms in the home. However, calculating the square footage is likely to be more precise.
I’ll give you an example of how you might calculate a home office deduction. For our home office of 100 square feet in a 1,000 square foot house, we will use a deduction percentage of 10%.
Here are our expenses for the home for the year:
Mortgage: $1,000 per month x 12 months: $12,000
Electricity: $70 per month x 12 months: $840
Gas: $50 per month x 12 months: $600
Homeowners insurance: $100 per month x 12 months: $1,200
Furnace repair: $2,000
Property taxes: $2,000
The total expense of running the home for 12 months was $18,640. Since our home office was determined to be 10% of the home, we can deduct 10% of the total expense, which would be $1,864.
Don’t forget that you can deduct in full any repairs made to the office specifically – so if we’d spent $200 painting the office, we can deduct that in full. That makes our total deduction $2,064.
Additional Deductions & Exceptions
If you have space in your home that you use for the storage of business items, you can also deduct that square footage, even if you use the area for other things as well. For example, when I kept a large shelving system full of business-related items in my living room I deducted the square footage that the shelves took up, even though the living room wasn’t a business-only area. Also, if you run a daycare from home, see Publication 587 (below) for special rules.
When Can’t You Take the Deduction?
Some examples of when you cannot use a home office deduction:
You are renting the space in your home to your employer (no double dipping).
You are working at home for your own convenience (e.g., if you have an office but choose when you want to work at home).
The area is used both for business purposes and personal purposes.
The IRS has produced Publication 587, Business Use Of Your Home, which is the final word on the latest IRS rules for the home office deduction. You should check it each year to make sure that the guidelines and limits haven’t been changed. Additionally, you can find more detailed information about how to deduct expenses and whether you should use Schedule A if you are an employee.
The home office deduction can save you a lot of money on your taxes. If you’re a small business owner looking to cut costs, now is the time to start pulling out those receipts, utility statements, mortgage statements, or cancelled rent checks to figure out how much you’ve spent on keeping your home and home office running.