If you run your own business or are an employee of a business, you may be able to deduct certain expenses associated with an office you use in your home. This includes mortgage interest, utilities, cleaning services, or a variety of other expenses associated with your home. You may qualify for the home office deduction whether or not you own the house or rent it. The home office must be associated with a trade or business; if you have a home office that you use for hobbies or other not-for-profit endeavors, then you do not qualify for the deduction. This deduction will be a line item on your Schedule C. There are two requirements that your office must meet in order to qualify for a deduction.
The two requirements are: the part of your home used as an office must be used exclusively for that business, and it must be used regularly as part of your business. Those are the two most fundamental words to remember when deciding whether or not you can take this deduction. Is it regularly used and exclusively used for business purposes. There are two exceptions to the exclusivity rule. One is if you run a daycare out of your home, you can deduct the portion of your home used for the day care, even if you use it for personal reasons as well. You must be licensed daycare or exempt from needing a license to qualify. The other exception is the storage of inventory or product samples. If you store either of these items in your house, you may be exempt from the exclusivity rule. To qualify, you must be able to answer “yes” to all five of these questions: “You sell products at wholesale or retail as your trade or business, you keep the inventory or product samples in your home for use in your trade or business, your home is the only fixed location of your trade or business, you use the storage space on a regular basis, the space you use is a separately identifiable space suitable for storage.” (IRS Website)
If you do not run your own business, but are an employee for another business and have a home office, you may still be able to get a deduction. The exclusive and regular requirements still apply, but there are two additional rules in order to qualify. First, the home office must be for the convenience of your employer. If you have a home office because you felt you needed it, and your employer is not aware, then you do not qualify for a home office deduction. Second, you cannot rent out a portion of your home to your employer and then use that portion to perform employee services for that business.
Click here to see a helpful map by the IRS to determine whether or not your home office qualifies.
After you have decided if your home office qualifies for deductions, there are two methods you can choose for taking a deduction: actual expense method or simplified method. The simplified method was first introduced for the 2013 tax year. This is a method you would want to use if you do not keep good records of expenses associated with your home, or if you simply do not want to keep those records. First, you determine your gross income and all your business expenses not associated with your home office for the year. You subtract the expenses from the income and if this number is $0 or less, you cannot take a home office deduction. If it is greater than $0, you take the square footage of your home office (not to exceed 300 square feet) and you multiply it by $5. You can deduct the smaller of the $5 times the square footage, or your gross income minus expenses. If you used a portion of your home for daycare and it was not exclusively used for daycare purposes, the simplified method will be slightly different. Click here, and follow links to “Instructions for the Daycare Facility Worksheet”.
You can choose the simplified method year by year. You are not stuck using it forever if you choose to use it one year. However, if you use the simplified method in a tax year, you cannot switch methods in the same year (for instance, if you must file an amended return, you cannot switch your method). Additionally, if you choose the simplified method, you cannot deduct actual expenses. You simply get the deduction as it is calculated, and that is it.
The other option is the actual expense method. For this method, there are three categories of expenses. The first is direct expenses which are expenses directly related to your business such as painting a the walls of your home office, or repairs only within your home office. These are fully deductible. Indirect expenses are things that partially apply to your home office such as property taxes, utilities, and mortgage interest. These are only partially deductible. Unrelated expenses are things that have nothing to do with your business such as lawn care in front of your house or painting a room in your house that is not your home office. These expenses are not deductible.
First, you’ll need to determine the percentage of business use for your home. You do this by dividing the square footage of your home office by the square footage of your entire home. For example, say your home is 2,000 square feet and your home office is 200 square feet. This means 10% of your home qualifies as business use of home. Then you can take all of your indirect expenses and multiply them by 10%. Once you have this total, you add it to the total amount of direct business expenses to come to your total deduction. When using the actual expense method, you can also depreciate a portion of your home as well which you cannot do using the simplified method.
As you can see, the actual method takes a bit more effort and record keeping to come to the deduction. You will have to evaluate the trade-off in order to see which method works best for your situation. Leave comments and questions below, and spread the word!