Do you work from home, or conduct a significant amount of business while at home? If you use part of your home for your business, you may be able to deduct some of the expenses for the business use of your home. The IRS Self-Employed Home Office Deduction applies to all types of homes and is available for both renters and homeowners.
The home office deduction is well worth taking if you qualify. However, it is often abused and is, therefore, a major red flag for IRS agents during an audit, and in some cases can even trigger an audit. It is therefore imperative that you make sure you qualify before taking the deduction. It is also of the utmost importance that you keep detailed expense records in case of an audit.
Determining Your Eligibility
You can claim the home office deduction whether you’re a renter or a homeowner, and on any type of dwelling, from single-family housing and duplexes to apartments and condos, even a houseboat! It should be noted, however, that temporary housing such as a hotel room does is not eligible for the deduction. Though, hotel rooms can typically be expensed at the full amount as a business deduction.
The home office deduction requirements also apply to freestanding structures, meaning you can use a studio, barn space, or garage for your home office provided it meets the “exclusive and regular use” requirement we’ll discuss below. To be eligible for the deduction, you must meet the following requirements:
- Exclusive and Regular Use – The space you use for your home office must be regularly used for business purposes, and cannot be used for another purpose. A spare bedroom would work, provided that you don’t use it for house guests, even a few days a year. A spare bedroom that also serves as a playroom for your children would not meet the requirement. It is important to have a space that is only ever used for business purposes; the IRS takes the term “exclusive” very seriously.
- Principal Place of Business – The space you use for your home office doesn’t have to be the only place you do business, but it does have to be your primary place of business. That means that you use the space regularly and exclusively for administrative or managerial work such as billing, setting up appointments, and keeping books or records.
There are two exceptions to the exclusivity rule. The first is if you use the office for storage of inventory or product samples you sell for your business. The other is for childcare or care for the elderly or disabled performed in the home; in that instance, you are still eligible for the deduction provided you have a license, certification, or approval as a daycare center under state law.
Determining Your Home Office Deduction
You can calculate your deduction the easy way, or the hard way. The choice is up to you. The simplified option allows you to deduct a prescribed rate, rather than your actual expenses. For the simplified option, the rate is $5 per square foot up to 300 square feet. If your office is larger than 300 square feet, then you won’t be able to use the simplified option.
The other method is more burdensome for many small business owners because it involves keeping detailed and thorough records. In this method, you’ll measure actual expenditures against your overall residential expenses. You can deduct mortgage interest, taxes, maintenance and repairs, insurance, utilities, and other expenses.
In addition to the square footage of the space, you can also deduct proportionate amounts of mortgage interest and/or mortgage insurance, rent, homeowner’s insurance, utility costs, repairs, pest control services, and depreciation. This means that, depending on the space you have, you may benefit from deducting based on actual expenses, particularly in a year where you’ve made improvements to the space, such as major repairs or a new paint job.
Need help figuring it out? You can use a form 8829 to determine which expenses you can deduct.
Simplified Version vs. Actual Expense Deduction
The choice of which method to use, assuming you’re eligible for the simplified method, really comes down to which method will save you more money. Unfortunately, this means keeping detailed, IRS-compliant records and doing some pretty intense math your first year to figure out what makes the most sense for you.
Some people opt for the simplified method for the sake of convenience, but depending on your situation you could be leaving money on the table unless you deduct your actual expenses. The general rule is that if you have a small home office, the simplified deduction is usually the most effective and saves you the time of all that record-keeping and calculating. However, if you have a larger office, it may be more beneficial to deduct based on your actual expenses.
The simplified version yields a maximum deduction of $1,500 for a 300 square-foot space. While your actual expenses may vary greatly, it is to your advantage to keep track of them, as you may be able to deduct substantially more depending on your expenses and the size of your space. A 150 square-foot space could yield a deduction of over $2,050, so tracking your expenses is really key to getting your maximum deduction.
Similar Tax Deductions
There are a number of tax deductions you can take as a small business owner or freelancer that can save you money come tax season. Car or truck expenses can often be deducted, and you can deduct based on the mileage you’ve driven for work. Supplies are tax-deductible, as are wages, salaries, and contract labor.
Travel costs are often deductible and can really add up if you travel routinely for work. Meals costs incurred while traveling are deductible at a rate of 50% as well, provided you can substantiate the cost. Rent or fees for any equipment or other items you use for your business are fully deductible.
If you are eligible for the home office deduction, don’t leave money on the table. Keep detailed records and proof to back up your claims, and be sure to keep an eye out for other potential deductions that could save you money come tax season.
Most everyone that does business from their home will qualify in some capacity for the home office deduction, but you’ll need to be aware that this is not only the most common deduction used each year – but the one that draws the most attention of the IRS because of abuse.
We’ve outlined what the home office deduction is, determining eligibility and how you can use it; but we haven’t talked much about expenses and why it’s important that every single business expense is tracked and records are kept.
After all, most deductions are based on expenses incurred throughout the business year.
For this reason, we have to mention Everlance, the #1 rated mileage & expense tracking app in the world. We’ve helped over 400,000 people track their business mileage & business expenses on a daily basis, finding an average of $6,500/yr in deductions per user.
That’s a lot of money!
Using Everlance makes mileage and expense tracking incredibly easy and while it definitely saves you a ton of money, it also saves you around 30 hours per year in time devoted to mileage tracking, expense tracking & recordkeeping.
Learn about the IRS commuting rule and what you can and cannot deduct.
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