How to Manage the Home Office Deduction
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes. There are basically two methods for deducting the portion you use for business: the simplified method and the regular method.
The simplified method grants a flat deduction for each square foot of the home you use as dedicated work space. The regular method requires you to determine the actual expenses associated with the home office. These expenses may include mortgage interest, insurance, utilities, repairs and depreciation. The regular method may give you a bigger deduction, but it requires more work, and the difference may not be worth it.
Are you eligible?
No matter which method you choose, you still have to meet stringent requirements to take the deduction. There are two basic requirements for your abode to qualify as a deduction:
- Regular and exclusive use.
- It's the principal place you conduct business.
If you conduct business at a location outside your home, but also use your home substantially and regularly to conduct business, you may still qualify for a home office deduction. The home office can be a room in your house or a freestanding structure — a studio, garage or barn — if it's used exclusively and regularly for your business.
The IRS is serious about "exclusive." If you use a den for your work from 9 a.m. to 5 p.m. and then your family uses it in the evenings to watch TV, you are not allowed to deduct it. However, the IRS does not require physical partitions. If there is a 5' x 5' part of your living room that you use exclusively for business, you are good to go.
The IRS grants a couple of very narrow exceptions to the exclusive rule: using part of your home to store sales samples or to provide licensed day care services. In both cases, there are special rules and calculations required to claim the exemption.
OK for employees?
Many freelance workers take advantage of the home office deduction, but there has long been a common misconception that employees cannot take this deduction. They have been able to —they just had to pass additional tests:
- Your business use must be for the convenience of your employer.
- You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.
If the use of the home office was merely appropriate and helpful, you cannot deduct expenses for the business use of your home.
These rules are still posted on the IRS site. However — and this is key — these old rules for employees with home offices may be moot. The tax reform bill largely eliminated this deduction for employees. (For the self-employed, however, tax reform doesn't change the home office deduction.)
No matter what your situation, don't hesitate to take the deduction if you meet the IRS requirements. In the past, many workers who were qualified avoided taking the deduction, fearing it would automatically trigger an audit. Because of the prevalence of the home office, this is not true now, if it ever was! Don't miss this valuable tax break. However, IRS guidance is complicated and the rules can be subtle, so be sure to consult with a tax professional if you think you might be entitled to the home office deduction.