This past tax season, there seemed to be some confusion about claiming Home Office deductions. Below I took part of the definition from Internal Revenue Service’s website, and the link, https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction, to hopefully address it in plain English.
Two Methods available to calculate eligible Home Office expenses
- Simplified Option – For taxable years starting on, or after, January 1, 2013 (filed in 2014), tax payers now have a choice to elect Simplified Option. In a nutshell, IRS has pre-determined/”packaged” a “rate” to include applicable Home Office expenses and all you have to do is use this “comprehensive/all inclusive” rate multiply the square footage of the home office to get the expenses that you are allowed to deduct on your returns. This way, you don’t have to keep track actual expenses occurred, nor to have the receipts put in a show box. If you adopt this approach which will help reduce the time and burden of preparing your returns.
- Regular Method – one must use actual expenses occurred by category and times the space devoted exclusively for business usage.
Note: please see example demonstrated in the “Indirect Expenses” below for clarification.
Requirements to Claim the Home Office Deduction
Regardless of the method chosen. there are two basic requirements for your home to qualify for deductions:
- Regular and exclusive use.
- Principal place of your business.
These TWO requirements are not either/or; both of them have to be met in order to claim the Home Office deduction.
Regular and exclusive use
You have one room or a “well marked” (defined) area that is solely utilized for business tasks including; meeting with clients/customers, processing invoices, marketing research, etc. You don’t use that room/area as children’s playroom, or as your workout place. It is used just for “business” purpose and for that purpose alone at all time.
Principal place of your business
There are no other places outside of your home that you use to conduct business. Although you might meet clients at their place, or at restaurants, you use your home office most of the time.
However, if you do meet clients/customers at home office as well as other locations, IRS’s position is you may be still able to qualify for the home office deduction.
Please note that to simplify Home Office deductions in this article, the focus in on self-employed or sole proprietors. For employees, from 2018 through 2025, you won’t be able to deduct any home office expense since the Tax Cuts and Jobs Act (TCJA) suspends miscellaneous itemized deductions subject to the 2% floor for this time period.
For more conservative clients, they are concerned and focused on “may” be eligible for deducting the Home Office expenses. If you could define an area or designate a room just for your business, it is rightfully so to claim the expenses. You just have to “follow the rule” and document well, in my humble opinion.
What can you deduct as Home Office expenses? There are again two main categories – direct and indirect expenses.
Those expenses are directly associated with your Home Office. Just to name a few: desk, chair, paintings on the wall. You could deduct 100% of the money spent on your Home office.
On the other hand you could only deduct a portion of business usage for indirect expenses like: property taxes, mortgage interests, utilities, and home insurance premiums paid. For instance: if your Home Office accounts for 10% of your house, and the property taxes is $14,000 for any given tax year. On your tax return, you will be deducting $1,400 property taxes on your returns, while the balance ($14,000*90%) will go on to your schedule A deductions and subject to any tax rules/calculations/limitations.
Now, can you see the “power” of Home Office deductions? The $1400 in the example listed above are dollar for dollar deductions off of your business income/revenue, as opposed to being deduced on schedule A, which are subject to some limitations due to your household taxable income level and other variables.
Also, please pay special attention to Depreciation Expenses. Depreciation expenses are deductions allowed for the wear and tear on your house for the home office portion. The catch is, later on, when you sell your house, the depreciation that you once deducted has to be recaptured (reducing the cost basis of your house), and as a result, it may or may not trigger any capital gain. For more details, please refer to IRS Publication 587 , or consult your CPA. If you need a second opinion, or would like to engage my service, I am here to help.
To the best of my knowledge and effort, I wrote this article in general terms as each person’s situation varies. Tax laws do change from time to time. No guarantee is made or claimed through this article. Personalized advice is recommended to consult’s one’s own advisor or contact the author.