Keys to Getting the Biggest Deduction for Your Home Office

The IRS recently issued a reminder about claiming the home office deduction and a simplified way to do it. However, many taxpayers with a home office would better off deducting expenses under the standard method. Others may not be even eligible to deduct any home office expenses. Here’s why.
Regular and Exclusive Use of Home Office
Most home-related expenses, such as utilities, insurance and repairs, are not deductible. But if you use part of your home for business purposes, you may be entitled to deduct a portion of these everyday expenses, within certain limits.
In general, you’ll qualify for a home office deduction if part of your home is used “regularly and exclusively” as your main place of business. Here’s an overview of these two tests:
  1. Regular use. You must use a specific area of your home for business on a regular basis. Incidental or occasional business use is not regular use. The IRS considers all the facts and circumstances for this determination.
  2. Exclusive use. You must use a specific area of your home only for business. This area can be a room or other separately identifiable space. It’s not necessary for the space to be physically partitioned off from the rest of the room. However, you don’t meet the requirements for the exclusive use test if the area is used both for business and personal purposes.
Rules for Work-From-Home Employees
If you’re an employee, the home office must be used for the employer’s convenience. In essence, this requirement should be spelled out in an employment contract with the company. For this reason, home office deductions are more likely to be claimed by self-employed taxpayers than employees who work for an unrelated business.Typically, you won’t qualify for deductions if you bring work home at night from your daytime office, either. Consider the relative importance of the activities performed at each place where you conduct business and the amount of time spent at each business location.Principal Place of Business Tests
Your home office will qualify as your principal place of business if you use the space exclusively and regularly for administrative or management activities of your business, and you don’t have another fixed location where you conduct substantial administrative or management activities.Examples of activities that are administrative or managerial in nature include:
  • Billing customers, clients or patients
  • Keeping books and records
  • Ordering supplies
  • Setting up appointments
  • Forwarding orders or writing reports
Other Ways to Qualify for Home Office Deduction
If your home isn’t your principal place of business, you may deduct home office expenses if you physically meet with patients, clients or customers on your premises. To qualify, the use of your home must be substantial and integral to the business conducted.Alternatively, you can claim the home office deduction if you use a storage area in your home — or if you have a separate free-standing structure (such as a studio, workshop, garage or barn) that’s used exclusively and regularly for your business. The structure doesn’t have to be your principal place of business or a place where you meet patients, clients or customers.Two Methods: Actual Expenses vs. Simplified
Traditionally, taxpayers deduct actual expenses when they claim a home office deduction. Deductible home office expenses may include:
  • Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,
  • A proportionate share of indirect expenses, such as mortgage interest, property taxes, utilities, repairs and insurance, and
  • A depreciation allowance.

Keeping track of actual expenses can be time consuming. Fortunately, there’s a streamlined method that’s allowed under a tax law change that went into effect in 2013: You can simply deduct $5 for each square foot of home office space, up to a maximum total of $1,500.

For example, if you’ve converted a 300-square-foot bedroom to an office you use exclusively and regularly for business, you can write off $1,500 under the simplified method (300 square feet x $5). However, if your business is located in a 600-square-foot finished basement, the deduction under the simplified method will still be only $1,500 because of the cap on the deduction under this method.

As you can see, the cap can make the simplified method less beneficial for larger home office spaces. But even for spaces of 300 square feet or less, taxpayers often qualify for a bigger deduction using the actual expense method. So, it can be worth the extra hassle.

Flexibility in Filing
When claiming the home office deduction, you’re not locked into a particular method. For instance, you might choose the actual expense method in 2017, use the simplified method in 2018 and then switch back to the actual expense method thereafter. The choice is yours.

This is a valuable tax-saving opportunity for many taxpayers, especially those who are self-employed and work from home. Consult with your professional tax advisor regarding what’s right for your personal situation.

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