Do You Qualify for a Home Office Deduction?

This month, you will receive paperwork documenting your 2018 income, as well as paperwork from those who paid you interest and from those you paid. You’ve also corralled receipts to document your deductions, right?

But before you sit down to take care of business, make sure you understand one key way to reduce your tax bill: the home office deduction. Here’s what you need to know.

1. Is it exclusive space?

A home office deduction is a great way to make normally nondeductible expenses like rent and utilities partially deductible. But simply doing some work at the dining room table isn’t enough to qualify. You must use part of your home as your principal place of business, and use it exclusively for that purpose.

According to the IRS:

You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.

That sounds straightforward, but it’s less so than it seems. For example, when the IRS says “exclusively,” it means:

  • 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.
  • The space you want to deduct expenses for can’t be used for personal purposes. The couch you watch TV on doesn’t count. And even if you do all of your accounting in the dining room, eating there nixes the deduction.

2. Is it the ‘principal place’?

The other major tricky term is “principal.” 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. The IRS further explains the rules as follows:

For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business.

3. Figuring the deduction

Before you begin, you’ll need to know the total square footage of your office space and home, because you’ll be deducting the percentage of home-related expenses 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’ll 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 also be fully deducted.

4. A new, simpler way to claim the deduction

Starting with tax year 2013, the IRS introduced a simpler way to compute the deduction. It allows those with qualifying home offices to deduct up to $1,500 nearly hassle-free. (According to the IRS, this collectively saves filers 1.6 million hours in paperwork and record keeping annually.)

Rather than adding up the proper percentage of rent, electricity and other home office expenses, all you do is use a formula. As we note in the video above, the rate for 2018 is $5 per square foot with a maximum of 300 square feet. That limits the deduction to $1,500 per year.

So if the portion of your home used for business is larger than 300 square feet, and/or the deduction would add up to more than $1,500, you’ll want to use the old method. If not, keep it simple by using the new one.

5. Don’t be shy, but do be careful

Because home offices are ever more ubiquitous, and the potential deduction is so attractive, you can imagine this is something many taxpayers might be tempted to abuse. After all, the IRS gets a copy of your W-2 from your employer, but the agency probably doesn’t yet know the square footage of your former guest bedroom.

But be careful. The same factors that make this deduction easy to fudge also make it one that invites scrutiny. This doesn’t mean you should be afraid to take it. Always take every deduction to which you’re legally entitled. But when it comes to this one, make sure you can verify it, just in case.

Do you have experience claiming your home office as a deduction? Share with us in comments below or on our Facebook page.

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