“I work from home. Are there any deductions I can take for my home office?”
Yes, but when it comes to claiming the home office deduction, the IRS has strict rules to dictate who qualifies. To get the most out of your home office deduction and avoid an audit, let’s review a few ground rules:
Exclusive and Regular Use
In order to be eligible for the deduction, the space you are claiming must only be used for business. Meaning, you can’t have a general home office that you sometimes use for work and sometimes use for a guest room, eating area (aka dining room table), workout room, arts and crafts area, etc. The only purpose of this space is your business.
While the IRS can be strict on this eligibility requirement, they use a common rule of thumb: if personal activities occur in your home office about as often as in a regular office, you’ll generally meet the requirement. So, if you take a couple of personal phone calls, you’re fine.
There is no set rule for how often you must use the space, but if you use your home office for a few hours a day you will generally meet the regularity requirement. If you’re rarely in the space each week, you probably won’t qualify.
There are two exceptions to the exclusivity rule:
- If you run a daycare out of your home, you potentially use your home regularly for childcare from 8 a.m. to 5 p.m. every day and then end up using the space for personal activities after your daycare closes at 5 p.m.
- If you dedicate a portion of your home to inventory or business products.
Principal Place of Business
Your home office doesn’t have to be the only place you do business, but it does have to be the primary place you do business. This could mean that you regularly meet clients and customers here, or you perform administrative tasks — such as billing and bookkeeping.
How to claim the home office deduction
There are two ways to calculate the home office deduction:
- The simplified square foot calculation
- The actual expense deduction
The Simplified Method
All you have to do here is multiply the square footage of your home office by $5.
The catch with this method is that the maximum you can deduct is $1,500. If you’re just starting out, this may be the right choice for you.
The Regular Method Using Form 8829
If your home office expenses exceed the $5/square foot calculation, you’ll want to use the regular method using Form 8829. To apply this method, calculate the percentages of the expenses you want to claim.
For this process, expenses are considered either direct or indirect.
Direct expenses are those that are clearly and definitively tied to your office space. For example, if you’ve had the walls painted or renovations done exclusively for your home office, it would qualify. You can claim 100% of direct expenses.
Indirect expenses are costs related to the property that houses your home office. This includes things like mortgage and rent or utilities. You may only claim a percentage of indirect expenses; the total square footage of your home divided by the square footage of your office.
The limit to the regular method is that you can’t claim more than you earn while working in your home office. Any deduction that exceeds the income for the business related to the home office will be carried to the next year.
“Which method should I use — simplified or regular?”
A few factors to take into consideration include:
The Size of your home office. If your home office is 300 square feet or less, the simplified method is typically better. If you have a bigger office, the regular method tends to get you a larger deduction. There’s no limit to the size of a home office using Form 8829.
Mortgage and rental rates if you live in an area where the cost of living is traditionally high, you will probably get a larger deduction using the regular method.
Recordkeeping. The regular method requires you to keep detailed records of everything related to your home office. If you prefer to go the easier route, the simplified method may be for you.
If you’re still unsure which method to choose — OR would just like someone to take care of it all for you — set up a consultation with Verdant today. Your first meeting is always FREE and our licensed CPAs can help clear up your questions and concerns.
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