Last updated on November 20, 2019 at 11:54 am
Do you work from home? If you do, you have lots of company. According to the IRS, 3.4 million taxpayers claim the home office tax deduction. You too may be eligible to take a home office tax deduction for a portion of your housing expenses.
The simple definition of a home office: part of a home that is used exclusively on a regular basis for business. This could be a dedicated room, part of a room or a separate structure.
How is exclusive use defined?
According to the IRS, to qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition. But, you do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. In fact, there are only two very narrowly defined exceptions to the exclusive rule test:
- Part of the home is used for the storage of inventory or product samples
- Part of the home is used as a daycare facility
How is regular use defined?
Regular use means that the home office area is used consistently for business purposes, rather than sporadically or occasionally. According to the IRS, “to qualify under the regular use test, you must use a specific area of your home for business on a regular basis.” Incidental or occasional business use is not regular use.
Eligibility to deduct home office expenses differs depending on whether you are self-employed or an employee. In either case, to be eligible to deduct home office expenses, a person must use a part of his or her residence exclusively on a regular basis in one of the following ways:
- As the principal place of business for any trade or business.
- As a place of business that is used by patients, clients or customers in meeting or dealing with the individual taxpayer in the normal course of his or her trade or business.
- In the case of a separate structure that is not attached to the residence, the space is used in connection with the person’s trade or business.
In addition, employees have a fourth criterion to meet: the exclusive business use of the home office must be for the convenience of the employer and not “merely appropriate and helpful.” Even though working from home may be appropriate and helpful for the employee, working from home must be for the employer’s convenience in order to be tax-deductible.
What expenses can be included in the home office tax deduction?
Home office expenses are grouped into direct and indirect expenses.
What are direct expenses?
A direct expense is a cost solely related to the home office and can be deducted in full. Direct expenses benefit only the business part of your home. They include painting or repairs made to the specific area or rooms used for business.
What are indirect expenses?
Indirect expenses apply to the whole property and are for keeping up and running your entire home. They benefit both the business and personal parts of your home and include expenses such as rent, insurance and utilities that are deductible based on the business use percentage of the home office.
Expenses related to a home office include:
- Property insurance
- Repairs and maintenance
- Casualty losses
- Mortgage interest
- Property taxes
Home Office Deduction Calculations
Because claiming a tax deduction for a home office used to be so confusing and complicated, a fairly new option was made available in 2014 that eliminates much of the paperwork.
Here is how it works: if your home office is your primary place business and is used exclusively for work, you can now claim $5 per square foot of the office, up to 300 square feet. The deduction will be capped at $1,500 per year.
However, for those of you who typically claim more than the $1,500 cap allowed under this simplified method, your expenses can still be deducted, as before, by figuring out what percentage the home office space is compared to the whole house or apartment. This percentage is used to determine how much of your indirect expenses can be deducted.
The IRS advises: to find the business percentage, compare the size of the part of your home that you use for business to your whole house. Use the resulting percentage to figure the business part of the expenses for operating your entire home. You can use any reasonable method to determine the business percentage. The following are two commonly used methods for figuring the percentage.
- Divide the area (length multiplied by the width) used for business by the total area of your home.
- If the rooms in your home are all about the same size, you can divide the number of rooms used for business by the total number of rooms in your home.”
Recordkeeping is Critical
Documents pertaining to the home office deduction should be kept along with your copy of the tax return. Relevant documentation may include:
- Measurements of the home office space and the total area of the home;
- Proof of payment for rent, utilities, repairs, insurance and other expenses claimed as part of the home office deduction;
- Documents showing that the home office is for the convenience of the employer (for employees);
- Documents showing that the home office area is used regularly and exclusively for business purposes.
Ken Bagner is a member of Sobel & Co. LLC. He is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. Plymouth Rock Assurance is proud to partner with NJCPA to bring you valuable tips for about your financial health. Qualified members of the NJSCPA can receive a discount on their car insurance through Plymouth Rock Assurance New Jersey.