Here is a question I am asked every year: "Can I get a deduction for my home office"? Below the answers and a few tips to get the biggest possible deduction for your home office.

What is a “home”?

First, for the purpose of claiming the home deduction, the term “home” includes a house, apartment, condominium, mobile home, boat, or similar property which provides basic living accommodations. Home also includes structures on the property, such as an unattached garage, studio, barn, or greenhouse.  Qualified individuals can claim the deduction whether they rent or own their home.

Next, to be deductible, your home office must be your principal place of business. This means you carry out administrative or management activities for your business in your home office. It also means that you do not have another fixed work location. Administrative and management duties include billing customers, keeping records, ordering supplies, setting up appointments, forwarding orders  and writing reports.

The “exclusive & regular” use tests

To qualify for the deduction, your home office must pass 2 tests:

Test #1: Exclusive use

Your home office must be used only for business. The area can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition. This test is not met if you use the area both for business and for personal purposes. For example, you cannot take the deduction if you use your den for business during the day and for TV viewing during the evening.

Test #2: Regular use

Your home office must be used for business on a regular basis. There is no time minimum but it must be a re-occurring use. For example, if you spend on hour in your home office each morning contacting customers and suppliers, you qualify for the deduction.

If you are self employed

In some occupations, you may spend a substantial amount of time conducting business away you’re your home.  In that situation, even if you conduct your business mostly on the road, you may still qualify for the tax deduction.  For example, if you regularly visit your customers, you qualify for the deduction if you use your home to set up appointments and write up orders. As a sole proprietor or as a self-employed individual you report the home office deduction on Form 1040- Schedule C.

If you are an employee

Typically you will not qualify for a home deduction if you bring work home at night from your daytime job. However, you may qualify for a deduction if you meet these additional 3 tests:

  1. You do not rent any part of the home to your
  2. You work from home for the convenience of your employer: that means that if your employer has a facility where employees can work, then your office-in-home deduction is not allowable.
  3. The requirement to work from home should be spelled out in your employment contract with the company. 

As an employee you report your home office expenses as itemized deductions on Form 1040 - Schedule A. The deduction is limited to the amount above 2% of your gross adjusted income.

If you are a partner in an LLC

If you are a partner in a multi-member LLC, you may deduct unreimbursed office-in-home paid on behalf of the partnership. For the partner to qualify for the deduction, the partnership agreement must require the partner to pay these expenses. Partners report deductible home expenses on Form 1040 – Schedule E – Part II.

If you are an S-Corp owner & C-Corp owner

If you are a shareholder in a corporation and you receive reasonable wages as an employee, you may be allowed to claim expenses for the business use of your home. As a corporation employee, you report your home office expenses as itemized deductions on Form 1040 - Schedule A. The deduction is limited to the amount above 2% of your gross adjusted income.

Deduction methods

To calculate the tax deduction, you may elect each tax year to use either the regular method or the simplified method.

Under the regular method, you calculate the deduction using a prorata of your actual expenses. Actual expenses include utilities, insurance, repairs, home improvements, mortgage interest, property taxes, and depreciation allowance. This may be the more generous method of the 2 if you have an office larger than 300 square feet.

Under the simplified method, the deduction is $5 for each square foot of the home office. The maximum deduction is for 300 square feet (ie a total maximum deduction of $1500). The simplified method reduces recordkeeping as you do not need to keep your home receipts to substantiate the deduction. This option makes it easier to keep records and saves time.

When claiming the home office deduction, you are not locked into a particular method. For instance you might choose the actual expense method in 2017 and use the simplified method in 2018. The choice is yours. Don’t hesitate to contact Karine Bauer, EA to select the most beneficial deduction. As always, the views contained in this article are not tax or legal advice and are not a substitute for consulting with a tax professional. Karine Bauer, EA is an Enrolled Agent licensed by the Treasury Department with unlimited rights to represent taxpayers before the Internal Revenue Service. She is an experienced tax professional with more than 20 years of international experience.

Published on February 17th, 2018