We are all constantly looking for the tax deductions that we can (legally) use, but it is tough to find some of them without professional advice. As tax professionals, one of the deductions we find is frequently missed – or at least not used out of fear of wondering if one really qualifies – is the home office deduction.
At the same time, though, this is a deduction that some people try to abuse. It has even been reported as a sort of a red flag for an audit. The mysterious, shrouded nature of the IRS means that one can never be completely sure if this is true, but it remains a deduction you want to be sure is correctly used.
The home office deduction is essentially just what it sounds like – if you use part of your home for business, then you may be able to deduct some expenses for the business use of your home. It is not even necessary that you own your home to take advantage of this, as renters are also eligible. In fact, it could even be said that it is often of more use to renters since they don’t get the breaks that paying a mortgage can lead to on other parts of a tax return.
There are requirements that must be fulfilled, however, to take the deduction. You are not simply allowed to use your home computer once a week to check work emails and claim a home office. In fact, if you go to the regular office from 9-5, Monday-Friday and occasionally check in on work from home, you do not have a home office. IRS requires “Regular and Exclusive Use” of an area to qualify.
The space does not necessarily have to be a separate room, but only the space used exclusively for business qualifies for the home office deduction. The space however needs to be physically separated from the rest of your home to qualify. If you want to get a little deeper into the mire of the IRS rules, you can visit their page on the subject. In fact, home office deductions can be based on the percentage of your home devoted to business use. So whatever space you use, even if a tiny one, can help lower your tax obligation.
Using this percentage method, you add up your actual home expenses (rent or mortgage interest, property tax, electric, gas, water, homeowner’s insurance, HOA fee, even repairs and renovations for any part of your home as well as often overlooked depreciation) and get back a portion of it based on the amount of space being used. There is also an optional method where you can take a standard $5 per square foot as your deduction. Finally, there is a third method based on the number of rooms in your home.
Another thing to keep in mind is that even though this is called a home “office” deduction, it does not have to only apply to what we think of generally as an office. Instead, think of it as dedicated business space. So even if you are a direct sales consultant (think Tupperware) and keep a certain amount of inventory on site, that can also be business space. The trunk of your car will not count, but a closet or garage potentially could.
In conclusion, this deduction is not simply a box you can check on a return. There are questions to be answered such as whether your space qualifies, which method you should use to claim it and what expenses could be part of it. In addition, there are complications if you are a shareholder of an S or C Corporation as your home office deduction on individual return cannot be directly linked to these corporate returns. There are also answers and solutions, though, and if you want help finding them, contact us and we will be very happy to help.
