Menu

Tax Strategies & Credits

Can You Deduct a Home Office, and Is It Worth It?

by
Steward Financial
on
4/20/2017
Can You Deduct a Home Office, and Is It Worth It?

More and more people are working from home these days. This is partially due to the boom in entrepreneurship and partially due to innovations in technology that allow employees to telecommute. The increase in these numbers has naturally led to more inquiries regarding taking the home office deduction. This process is not as straightforward as you may think, and many people have claimed this deduction without actually being entitled to it. This can lead to penalties and fines, so before you assume that you qualify, it’s a good idea to do your homework and understand exactly what its requirements and limitations are, as well as whether or not taking the deduction would provide you with a benefit.

What Qualifies As a Home Office?

In order for you to be eligible to take a deduction for a home office, you must have allocated a particular area of your home as being exclusively for your business purposes. This use must be on a continuous basis and if you use the area for any type of personal application you cannot take the deduction.  The Internal Revenue Service provides a list of possibilities for qualification, and you must be able to show at least one of these to be true:

  • Area must be the principal place of business for any of your trades or businesses;
  • Area must be where you meet with customers, clients or patients. Using it for telephone contact only is not enough);
  • Area must not be attached to your home, but is in a separate structure that is specifically used for the business;
  • Area is used as a licensed day care center. This does not have to be its exclusive use; or,
  • Area must be used for storage of a wholesale or retail business’ inventory, with your home being the only fixed location. This does not have to be its exclusive use, though the use for this purpose must be regular.

If any one of these elements is present then the home office deduction test has been met. However, if you are using your home office as your place of business as an employee there is another important requirement: your use of your home must meet the criteria for being for your employer’s convenience. This is defined as your working from home being a condition of your employment because the employer doesn’t provide another location or the location that is available is either unsafe or inadequate.

The argument of what is most convenient or desirable for you as an employee does not meet the standard of being for the convenience of your employer, and therefore would not allow you to take the home office deduction.

How to Determine How Much Your Home Office Deduction Should Be

There are two different ways that you can calculate the correct tax deduction for your home office. The first is the simplified method, or safe-harbor method. This is much simpler and more straightforward, but it may be to your benefit to choose the second method, which is the actual expense method. 

Simplified Method – This method allows the taxpayer to calculate the square footage that is being used for business purposes and then simply to take a deduction of $5 per square foot. The IRS limits the amount of square footage that can be used in this method to 300 square feet, and therefore limits the annual deduction to $1,500. This approach may be complicated if you only use the area as a hoe office for part of the year. If this is the case, then you need to calculate the average over the course of the year.

Actual Expense Method – This method allows you to prorate your actual home expenses based on how much of the home is being used for the home office. These expenses can include such things as heating and electric, home maintenance, depreciation, mortgage interest and real estate taxes. If you are a renter then you can replace interest, depreciation and tax payments with the amount that you pay in rent. You can also directly deduct all expenses that are specific to the home office itself.

When preparing your Schedule A, those using the simplified method are able to deduct all of the qualified home mortgage interest and taxes, while those using the actual expense method can only itemize the difference between 100% of those expenses and the amount that is being claimed as a home office expense.

Limitations on the Home Office Deduction That Can Be Taken 

There is a limit that is placed on the amount that can be taken for a home office deduction: you are not permitted to deduct more than the gross income derived from the business. If you are an employee, you may not deduct more than the wages that you earn. For this deduction, gross income is defined as the gross sales minus the cost of any goods sold, as well as amount of taxes and mortgage interest that has been allocated to the business and any business expenses that were not allocated to the home office expenses. The deduction for mortgage interest and taxes does not apply if you use the simplified method. It is also important to remember that if your expenses are greater than what you are able to deduct as a result of these limitations, then the unused portion can be carried over as long as you are using the actual method.

In Case of Move

Moving in the middle of the year can make deducting a home office more complicated, whether you are the owner of the home or you are renting. As a homeowner, as long as you have lived in the property for two out of the last 5 years before you sell you are still able to take the gain exclusion ($250,000 for a single, $500,000 for a married couple), even if you used part of the home for your business.

However, if you claimed any depreciation for the home office after May 6, 1997 you cannot exclude that amount as part of the gain if the office was in the same structure.  If the office is in a separate structure then the sale must be structured as two separate transactions and the gain is not permitted as an exclusion. This is a significant consideration for homeowners claiming the home office deduction.

Renters who move out of their rental property in the middle of the year and who relocate to another site that they will also be using as a home office will need to calculate each location’s specific expenses and business use area when preparing their taxes. For those who will not be utilizing their new location as a home office, only the expenses for the initial location need to be calculated, and the deduction is only allowable for the period of time that you lived there.

The availability of a home office deduction does not always mean that it is a good option for you, even if you work from your home. For knowledgeable advice as to whether you should take advantage of this write off, connect with a professional today to set up an appointment.

share this post
Search for matches...
Steward Financial

Steward Financial

Jon Osborn is a tax preparer based in San Dimas, California. His company, Steward Financial Services, offers a broad range of tax preparation, accounting and business consulting for small businesses. He loves to work with clients who are looking for answers to complex tax and business planning issues. He has owned several small businesses and worked with over one hundred small business owners. He helps his individual and business tax clients find the best ways to spend their money in order to minimize IRS tax. Small businesses looking to grow, sell or just increase cash flow are one of Jon's specialties.

Steward Financial Services
★ ★ ★ ★ ★
38 reviews

California

Firm Profile

Recommended Professionals

In the face of economic uncertainty, TaxBuzz is the industry's most up-to-date tax information.

Join 60,000 who get our weekly newsletter. No spam.

We know tax and accounting issues are complicated.

Do you have additional questions on this topic for this author?

Related Posts

Latest Posts