Client Advisory Services

Q&A: The Home Office Deduction

August 2, 2017

The internet has created opportunities for tens of millions of people to start businesses from their homes. Whether they’ve gone all in or they’re moonlighting, these individuals have had to learn a whole new set of IRS rules. One that seems especially appealing to many is the home office deduction, or “Business Use of Home,” as the IRS calls it. Are you eligible? Here are some of the basics.

How does the IRS define “home?”

Very broadly. It can be a single-family dwelling, apartment, mobile home, or boat. It may also be an unattached structure on your property, like a studio or barn. Before you can calculate your deduction, you’ll have to determine what percentage of your home your workspace occupies.

How do I qualify for this deduction?

You need to be using the space, “… exclusively and regularly,” as the primary location for your trade or business. You may also be eligible if you use the square footage for certain types of storage (like product inventory) or as a rental or daycare facility. It must be your principal place of business, the place where you do the bulk of your administrative/managerial work, even if you do some of your tasks at other locations.

My employer asks me to work from home regularly. Do I meet the requirements?

Yes, if your home workspace qualifies under the previously-stated rules and your home-based work is done for the, “…convenience of your employer.”

What if I rent my home?

You can still take the home office deduction if you meet the stated requirements.

Is this a 12-month deduction?

Only if you used part of your home for business purposes for an entire calendar year. If you started using it for work on June 1, you can only deduct the expenses incurred from June through December.

How do I calculate my deduction?

There are two ways to determine what your deduction will be. The first and most complicated is by calculating Actual Expenses. There are two types:

Direct expenses include things like painting and repairs performed only in the sections of your home that you use in running your business.
Indirect expenses are costs related to upkeep of your entire home (utilities, insurance, security system, etc.). If your home office takes up 12 percent of your house or other dwelling, you can deduct only 12 percent of the money spent.

The Simplified Method has been an option for several years. It’s only permissible if your allowable business area measures less than 300 square feet. To start, you’d multiply the square footage used for business by $5. Easy enough. But then you run into what’s called the Gross income limitation, which requires some complex calculations. The home office deduction is sometimes considered a red flag by the IRS, one of those income tax scenarios that could trigger an audit. It also has a lot of fine print. Contact us if you’re considering taking it, and we can help you determine whether the deduction would reduce your tax bill enough to risk it.

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Q&A: The Home Office Deduction

How does the IRS define “home?”

How do I qualify for this deduction?

My employer asks me to work from home regularly. Do I meet the requirements?

What if I rent my home?

Is this a 12-month deduction?

How do I calculate my deduction?

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