Working from home has its perks. You can skip the commute, wear comfy clothing and enjoy a more flexible schedule. You also might save money on your tax return. Deductions for home office expenses could save you a bundle if you meet the qualifications.
The home office deduction is available to homeowners and renters and applies to all types of homes. There are basically two methods for deducting the portion you use for business: the simplified method and regular method. The simplified method grants a flat deduction of $5 a square foot — up to 300 square feet ($1,500) — for your dedicated work space. The regular method requires you to determine the actual expenses associated with your home office. Some of the common expenses include mortgage interest, insurance, utilities, property taxes and depreciation. The regular method might give you a bigger deduction, but requires more work. The difference might not be worth it. Taxpayers can choose between the simplified method and regular method on a year-to-year basis.
To qualify for home office deductions, part of your home must be used “regularly and exclusively” as your principal place of business. This is defined as follows:
Regular use. You use a specific area of your home for business on a regular basis. Incidental or occasional business use isn’t considered regular use.
Exclusive use. You use a specific area of your home only for business. It’s not required that the space be physically partitioned off. But you don’t meet the requirements if the area is used for both business and personal purposes, such as a home office that you also use as a guest bedroom. The IRS grants a couple of very narrow exceptions to the exclusive rule: using part of your home to store sales samples or provide licensed day care services. In both cases, special rules and calculations are required to claim the deduction.
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 don’t have another fixed location where you conduct substantial administrative or management activities.
Examples of activities that meet this requirement include:
Billing customers, clients or patients.
Keeping books and records.
Setting up appointments.
Forwarding orders or writing reports.
If your home isn’t your principal place of business, you could still deduct home office expenses if you physically meet with patients, clients or customers on the premises. The use of your home must be substantial and integral to the business conducted.
Alternatively, you could claim the home office deduction if you have a storage area in your home — or in a separate, free-standing structure such as a barn, garage, studio or workshop — that’s used exclusively and regularly for your business.
Employee expenses for business use of the home aren’t allowed. The Tax Cuts & Jobs Act tax reform bill suspended this deduction for employees with its suspension of all miscellaneous itemized deductions subject to the 2 percent of adjusted gross income limitation.
The home office deduction can provide a valuable tax-savings opportunity for business owners and other self-employed taxpayers who work from home. Be sure to pay close attention to the rules, though, to ensure you’re eligible. Make sure your recordkeeping is complete.Also keep in mind that when you sell your house, there could be tax implications if you’ve claimed a home office deduction.
Finally, talk with your tax advisor if you have questions. Your advisor can help ensure you’re eligible for the deduction, maintain proper records and reap the most tax benefits from the business use of your home.