Can You Claim a Home Office Tax Deduction?

Photo (cc) by Sean MacEntee

Between 15 and 20 million U.S. workers either telecommute or are self-employed, according to the Telework Research Network. But the IRS recently said only about 3.4 million claimed a home office deduction in tax year 2010.

While it’s possible many of those self-employed or telecommuters don’t qualify, it’s possible the fear of an audit could also be keeping people away. But a home office deduction can be valuable, and those eligible should take it.

In the video below, Money Talks News founder and CPA Stacy Johnson breaks down the basics about home office deductions. Check it out, then read on for more.

A home office deduction could be worth thousands, so make sure you take advantage of your eligible business expenses. Here’s how you know if, and how much, you can deduct from working at home…

Exclusive use

IRS Publication 587 says, “To qualify to deduct expenses for business use of your home, you must use part of your home … exclusively and regularly as your principal place of business.” That sounds straightforward, but there are some key terms that aren’t spelled out. The first of these is “exclusively,” and here’s how it works.

  1. The space can be as small as a desk or as big as a room – there’s no size requirement, and there don’t have to be walls or partitions marking it off. It just has to be a “separately identifiable space” and used exclusively for business.
  2. The space you want to deduct expenses for cannot be used for personal purposes – so the couch you watch TV on doesn’t count, and even if you do all your accounting in the dining room, eating there nixes the deduction.
  3. You can ignore the previous point if the business use is “storage” or “daycare,” but there is an entirely different set of requirements you have to meet. Storage space has to be for product inventory you intend to sell, and your home has to be “the only fixed location” of your business. So you don’t qualify if you’re just storing extra business equipment, or operate in a commercial space and keep spare stock at home. Daycares have to meet and maintain state licensing requirements – you can’t claim the deduction just because your kids are always running in and out of the office.
  4. Like independent contractors or sole proprietors, employees can deduct home office expenses – but there are additional restrictions. Your use has to be for the company’s convenience (because they lack space, for instance) instead of yours (it’s easier to work from home). You also can’t double-dip by renting the space to your employer and claiming the deduction: it’s one or the other.

Primary/principal place

The other major tricky term is “principal.” Here’s what the IRS means by that…

  1. It’s OK to have more than one place of business and claim the deduction. But you can only claim the home office if it’s where you do the majority of the work, or certain kinds of work. Fail this test? Don’t stop reading yet, because…
  2. Even if your home office isn’t where you spend the most time or do the most important part of your job, it’s still a valid deduction if you use it “exclusively and regularly for administrative or management activities” such as billing, record keeping, ordering, writing reports, or booking appointments. So people like plumbers, whose job is to visit other people’s homes and businesses for a living, can still potentially claim the deduction.
  3. There are several situations that don’t automatically disqualify your home office, including: having somebody else handle the administrative stuff, handling those kinds of tasks minimally outside the office or while traveling (“places that are not fixed locations of your business”), or primarily using your home office for administrative tasks even though another place in your business has ample space for them.
  4. Another big exception for doctors, dentists, attorneys, and many other professionals: If part of your home is used exclusively and regularly to meet with clients, patients, or customers, it still qualifies for the deduction without being your primary place of business. But telephone or video calls and occasional visits don’t count – you have to meet in person, regularly.
  5. It’s OK to take a partial deduction if you met the requirements only for part of the year – just make sure you get the math straight.

Figuring the deduction

If you thought all the allowances and exceptions were messy, at least the IRS has a flow chart for that.

The hard part is doing the math, which isn’t quickly summed up. If you use tax software, you have a leg up. If not, you may need a free home office deduction calculator, a tax pro, or a little patience.

If you file Schedule F (Form 1040) or are an employee or business partner, use this home office deduction worksheet to figure things out. If you’re self-employed and file a Schedule C (Form 1040), refer to Form 8829.

Whatever you use, you’ll definitely need to know the total square footage of your office space and home, because you can only deduct the percentage of expenses in your home that the business uses. So if you have a 2,000-square-foot home and use a 200-square-foot spare bedroom as a home office, you can deduct up to 10 percent of the rent or mortgage payments, utilities, insurance, and so on. Stuff that’s only for the business area, like paint, can be fully deducted.

Bottom line? Don’t shy away from this deduction if you’re eligible. Take the time to figure it out and save some money, but document everything. This is an area of the tax law rife with abuse, so the IRS does keep a watchful eye.

Need more help with taxes? Our series on tax hacks isn’t over yet. Check out the links below and watch for more stories.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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