Working from home is on the rise in America, yet many home-based workers still aren’t sure if they should be claiming the home office deduction. According to the U.S. Census Bureau, 13.4 million people worked at least one day per week at home in 2010. That’s an increase of more than 4 million people, or 35%, in the last decade. If you take the time to find out if you qualify for this deduction, which can be sizeable, it could make a big difference in your tax return.
Homeowners and renters are both eligible for the home office deduction, and it applies to freelancers, small business owners, telecommuters, and home-based company employees. With this tax deduction, you can write off things like rent or mortgage, painting the room, real estate taxes, utilities, and home insurance. Many home-based workers shy away from this deduction because its rules are somewhat confusing, but it is a potentially lucrative deduction. While the language can be difficult, always refer to the IRS for the most accurate information.
Others are scared off by rumors suggesting the home office deduction is an audit trigger, but most professionals would agree this is a myth. Jeff Porter, CPA and principle of Porter & Associates, says it’s no more or less likely to flag an audit than any other part of your return. “From time to time, if the return itself has reasons for an audit, then the home office might be something the IRS looks at,” he says, “but I’ve never seen an audit for the sole purpose of an office in the home.”
The full explanation of the home office deduction is outlined in Publication 587, Business Use of Your Home, which includes specific requirements, the types of expenses you can deduct, how to figure the deduction (including depreciation of your home), special rules for daycare providers, and tax implications of selling a home that was used partly for business. Here are the basic requirements you must meet to qualify for the home office deduction, as well as the options available for figuring the deduction.
Requirements to claim the home office deduction
The IRS lists two main requirements for your home office to qualify for the deduction. The requirements are listed as “Regular and Exclusive Use” and “Principal Place of Your Business.” The exclusivity rule disqualifies a lot of home offices. It means that your at-home work area cannot be used for any personal activities or purposes. If you work at the dining room table, that doesn’t qualify. However, your workspace does not have to be a separate room. An area, such as a corner of your den, that is “separately identifiable” and used only for work is fine. There are occasional exceptions to the exclusivity rule, such as for a multi-purpose space where business inventory is stored. Be sure to take photos of your home office in case you are audited.
The “Principal Place of Business” rule means your home should be where most of your business takes place. If you occasionally take home work on the weekend, that doesn’t count. There are some exceptions to this rule as well. If you use your home office space to meet clients or customers in the normal course of your business, or if your home office is a separate structure not attached to your home, such as a garage, you may still qualify for the deduction.
If you are an employee, there is one more rule to keep in mind. The business use of your home must be for the convenience of your employer. In other words, if you requested working at home for your own personal convenience, you will not qualify for the deduction.
How to calculate the home office deduction
The regular method of figuring your deduction involves calculating the actual expenses of your home office. These can include mortgage interest, insurance, utilities, repairs, and depreciation. Generally, with the regular method, deductions are based on the percentage of your home devoted to business use. Whether you work out of an entire room or just part of one, you’ll need to determine the percentage of your home that is devoted to business activities.
Starting in 2013, the IRS introduced a new simplified option for figuring your home office deduction. Instead of determining actual expenses, with the simplified option, you can choose the standard deduction of $5 per square foot of home office space, with a maximum of 300 square feet. While the regular method has some calculation, allocation, and substantiation requirements that are complex and for small business owners, this option can help ease the recordkeeping burden for all home-based workers. Check out this IRS video for more on the simplified option.