Home is where the heart is…& deductions too!
Gone are the days when a home office deduction was a flag for audit. Bloomberg Businessweek online suggests that there were 4.34 million self-employed people working exclusively from home. And those who work at least partially from home equaled approximately 11.33 million.
A home office allows for deducting part of the following expenses:
- Rent
- Mortgage interest & real estate taxes
- Utilities
- Maintenance & repairs
- Cleaning
According to IRS Publication 587, to qualify as a home office, you must pass the “Exclusive Use Test.” To qualify, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. For example, an attorney who uses her den to write briefs, & who’s family also uses the area to watch TV, does not qualify as exclusive use.
However, there are exceptions to the rule, such as using your home for storage of inventory or product samples, or using your home as a daycare facility (this is discussed separately in the publication).
Further, you must pass one of three tests.
The home office must be:
- Your principal place of business,
- A place to meet with patients, clients, or customers in the normal course of business,
- A separate structure that is used for your business.
To determine whether your home office qualifies as a principal place of business, you should consider the relative importance of activities performed there, & the amount of time spent in that office. Alternatively, if you use it exclusively & regularly for administrative or management activities, or there is no other fixed location where you conduct these activities.
If you meet with patients, clients, or customers in your home office, you can claim the deductions. Doctors, attorneys, bookkeepers, & other professionals who maintain offices in their home generally meet this requirement.
If your home office is a separate standing structure, such as a studio, workshop, garage, or barn, you may deduct certain expenses. In this case, it does not need to be the principal place of business or a place where you meet w/clients.
Home office deductions allow you to deduct only the business portion of expenses. You must determine the amount of your home that is used for the home office, & deduct only that part of the overall expense.
Two common ways to determine the percentage of deductible expenses are as follows:
- Divide the square footage of your office by the total square footage of your home.
- If the rooms in your home are roughly the same size, you can divide the number of rooms used for business by the total number of rooms in your home.
Where are these deductions claimed? That depends on the type of business classification.
Employees determine their allowable deduction by using a worksheet found within IRS Publication 587. The permissible deduction is then entered on Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses.
Self-employed individuals compute home office deductions on form 8829, Expenses for Business Use of Your Home.
As with all other deductions, it is imperative that you maintain excellent records of your expenses. It is a good idea to keep your home office percentage calculations with your returns, & include photos as well. The better prepared you are to defend your home office classification, the better your outcome should you be audited.
Please note, this is not legal advice. Please see a licensed CPA about what deductions may be available to you & your specific circumstances.