Tips for Claiming the Home Office Deduction
March 17, 2016 : Sasha Drakulovic – The Tax InstituteLeer en español
In our global economy, more people are being afforded the opportunity to work from home. If you set up an area in your house to work, you may be able to claim the home office deduction, which will allow you to deduct the expenses for the business use of your home.
This is a useful tax benefit that has some misconceptions. Many taxpayers worry that claiming the home office deduction will trigger an audit. However, in recent years, the IRS has made it easier to claim the deduction by introducing the new simplified method of deducting expenses. If you follow the rules below, you may be able to claim a deduction for working at home.
Your home office must meet the regular and exclusive tests.
In order to claim the deduction, your home office must be used regularly and exclusively for a business purpose. Your home office must also be:
- Your principal place of business, or
- The place where you meet or deal with patients, clients or customers in the normal course of your trade or business, or
- A separate structure that is not attached to your home, such as a garage, studio or workshop.
In order to meet the test for exclusive use, the area designated as the home office must be used only for your trade or business. This means that if you do your work on the kitchen table that your family also eats at every night, you won’t be able to meet the exclusive use test. Although your office “space” doesn’t need to be separated by a permanent partition, like a wall, it does need to be an area separate from personal use.
In order for your office area to have regular use, it must be used for business more than occasionally. So you can’t deduct a home office that you use once a year to do your taxes in.
If you are an employee, you must also meet the “convenience of the employer” test.
Employees may only take the home office deduction if they meet the regular and exclusive tests and also meet an additional requirement of maintaining the home office for the convenience of the employer. An employee’s home office is deemed to be for an employer’s convenience only if it is:
- maintained as a condition of employment
- necessary for the employer’s business to properly function, or
- needed to allow the employee to properly perform his or her duties.
This test can only be met if your employer doesn’t provide you with an office, requiring you to work from home.
Figuring the deduction using either the regular or simplified methods.
Once you have met the requirements for having a home office, it’s time to actually figure your deduction. The IRS gives you the options of using the regular method or the new simplified method. In order to get the best deduction, you may want to calculate expenses using both methods and file with the most favorable method.
Using the regular method, you will figure out your actual expenses for the year and divide them between business and personal use.
Expenses that are only used for your home office (direct expenses) are allowed in full. This means if you paint just your home office, you can deduct the expense in full.
However, expenses for maintaining and running the entire home (indirect expenses) will only be allowed based on the percentage of your home used for business. Indirect expenses include mortgage payments, insurance and utilities.
You can use any method to figure the percentage of your home that is used for business. The two most commonly used are the “rooms” and “square footage” methods.
If all the rooms in your home are about the same size, you can figure the percentage based on how many rooms you have. For example, if you have 10 rooms, and one is your home office, you can deduct 10% of your total expenses.
If the rooms in your home are not the same size, you can instead use the square footage method. To calculate the percentage, divide the square footage (length times width) of your home office by the square footage of your entire house. The result is the percentage of the total expenses you can deduct.
If using the method above seems too complicated, you can instead use the simplified method to figure your deduction. For this method you just multiply the allowable square footage of your office by a flat rate of $5. The area you can use to figure your deduction is limited to 300 square feet.
No matter which method you use, if the amount of your business expenses is more than the gross income from your business, your home office deduction will be limited.