Determining if You Can Deduct Your Home Office From Your Taxes
Many people are electing to work from home instead of at an office. Working from home can be less expensive than renting an office and it can be more productive since you are not being distracted by the atmosphere of a busy office. The IRS allows for home offices to be used as a deduction on taxes as long as certain requirements are met. This deduction applies to both homeowners and renters, and applies to all types of homes.
There are two requirements that must be met for a home office to qualify as a deduction on a taxpayer's taxes.
Requirement #1: Regular and Exclusive Use
The part of the home that can qualify for a deduction must be used exclusively for conducting business. Ideally, you would want to use a separate room or other space that is clearly only used for your business.
Requirement #2: Principal Place Of Your Business
The home office must be your principal place of business. You would not be able to have an office outside the home that you use on a regular basis and a room at your home with a desk that is used occasionally. The home office must be the place where most of the business is conducted. However, you may still be able to qualify for a home office deduction if you have other locations where you conduct business outside of your home as long as the home office is substantially and regularly used.
Your employees may also take advantage of the home office deduction if they use part of their home for business. They must still meet the two requirements above plus these two additional requirements.
Employee Use Requirement #1: The reason for the employee using their home office must be for the convenience of the employer. In other words, if the employee can work from a business office but chooses to work at home, then this requirement would not be met.
Employee Use Requirement #2: The portion of the home used for conducting business cannot be also rented to the business. This would mean the business is paying the employee for their use of the home and so the employee would not be able to claim it as a deduction.
There are two options to calculating how much you can claim on your taxes: Simplified Option and Regular Method.
The IRS has created a more simplified option for calculating home office deductions starting with the tax year 2014. Here are some highlights of the Simplified Option:
- This option allows for a standard deduction of $5 per square feet of the part of the home that is used for business up to 300 square feet.
- You cannot take a deduction on the depreciation of your home nor recapture depreciation upon sale of the home.
- The deduction cannot exceed the gross income generated by the business use of the home minus business expenses.
- Unlike, the Regular Method, you cannot carry over any excess of the above gross income limitation to the next year.
- Likewise, unlike the Regular Method, you cannot carry over any loss from using the regular method in the prior year.
This method was the only available method prior to 2012. Here are some highlights of the Regular Method.
- This method bases the deductions for the home office on the percentage of the entire home that is devoted to business use. You would simply calculate the exact square footage of the part of the home used for business and divide that by the total square foot of the home. This would give you a percentage of the home used for business activities.
- You then must determine the actual expenses of the home. The expenses may include such items as mortgage interest, insurance, utilities, repairs, and depreciation. You would then multiply the percentage of the home used for business activities by the total actual expenses to come up with your deduction.
- When selling the home you can recapture any depreciation on any gain.
- Like the Simplified Method, the deduction cannot exceed the gross income generated by the business use of the home minus business expenses.
- However, you can carry over any amount in excess of the gross income limitation.
- You can carry over any loss the prior year as long as the gross income test is met in the current year.
With the more simplified option, it is easier to calculate how much you can claim as a deduction on your taxes. However, you are free to choose either the simplified or regular method for any taxable year. Once you have chosen a particular method you cannot change the method for the same taxable year.
It is advisable to seek the advice of a tax accountant when deciding if and how much you can claim as a deduction of your home office. More detailed information on the calculation of each of these methods can be found on the IRS website here: http://www.irs.gov/publications/p587/index.html