How Should You Claim Your Home Office Deduction?

Thousands of people work from home. Some of them can claim the costs of using their home against their taxes. You must know two things:

  1. Are you eligible for a home office tax deduction?
  2.  How may you claim the deduction?

When you know the answers to these two questions, you may be on your way to saving money. Let us begin with the information you need to answer the first question: are you eligible?

Can You Claim a Home Office Deduction?

The IRS Publication 587 explains home office use. It says that to claim for using part your home, or other domestic building like a garage or shed, it must be both your principal place of business, and it must be used exclusively for business.

Quite simply this means, for example, that if you have an office in your principal place of business, but you sometimes work from home, then you cannot claim a deduction because your principal place is not your home. Secondly, if you do only work from home, but you clear a space on your dining table every day, but still eat meals at the table, then it is not exclusive. The same would go for working out of your guest bedroom, say. If that bedroom is also used by your guests, even just once or twice a year, then it is not exclusive, and cannot be claimed. The IRS is very clear – principal and exclusive.

If you meet those two criteria, then you may claim the deduction. Let us go into that in a little more detail:

  1. Employees Get Some Leeway. If you are an employee, and your employer has business premises, but your boss cannot provide you with workspace, and, as a result, you work from home, then you can claim the deduction, as long as you meet the “exclusive” test. You may not, however, charge your employer rent on your home office and claim the tax deduction too.
  2. No Size Limit. You may own a very small business, and have a desk or work table in part of a room or garage, that you use for nothing other than your principal work space. If that is true, then even though you cannot claim for the whole room, you can claim for the part of the room your exclusive work area takes up. So can you answer yes to this question: “Is this a separately identifiable space that I use exclusively for business?”
  3. Storage Space Counts. If you exclusively use part of your home to store product you sell to your customers, then you can claim that space. Again, you cannot claim just for storing overflow inventory in your garage. It must be the principal storage place for your business.
  4. Day Care Counts. You may be able to claim for your day care business as long as you also satisfy appropriate licensing and safety standards.
  5. Many Professionals (doctors, attorneys, etc) who often and usually meet with clients in an exclusively-used room at home may claim the deduction, even though they may also have a surgery or law office where they conduct other business.
  6. Part of the Year Counts. You may make a partial claim if you meet the requirements for part of the year.

Which Claim Method Should You Use?

The IRS gives you two ways to claim the deduction:

  1. Original Deduction (or Regular Option) Method.
  2. Simplified Deduction Method.

Original or Regular Option

With this method you track the actual expenses incurred, you enter them on Form 8829, and transfer the amount to your Schedule C. You may claim all actual and direct expenses, such as a new light for the office, or the cost of repainting the room, etc. You may deduct a percentage of indirect costs, such as property taxes and electricity used. You calculate the amount according to the percentage of your home’s total square footage, and how much of it you use exclusively for business. The worksheet with examples, looks like this.

The Simplified Method

As it sounds, this is a quick and simple way to calculate your deduction. You may claim $5 per square foot of space, up to a maximum of 300 square feet, or $1,500. You may include the same percentage of property taxes and, say, mortgage interest. You may not claim depreciation on the property, and you may not reclaim any losses incurred on the sale of the property.

Which Method is Best?

Your overall tax situation determines the more appropriate method. The simplifies method limits, for example, how much of your property taxes you can claim. Higher income earners are limited in their overall itemized deductions. By choosing the simplified method, your deductions may be lower, and so your profits may be higher. This, in turn, may affect your overall tax liability. Any alternative minimum tax liability may also play a role in which method you choose.

The Take-Away

If you work from home, you may be eligible to deduct your home-office costs, and so reduce your tax bill. Taxes are complicated, and so it always pays to seek the advice of an expert.

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