Deducting a Home Office

Complete information for taking the Home Office Deduction can be found in IRS Publication 587. The deduction is calculated on Form 8829, which transfers to Schedule C. It should be noted that employees who receive a W-2 may also be eligible to claim a home office as an itemized deduction, however this information is not covered here.

Advantages of the Home Office Deduction

The advantages of deducting a home office is that you can take expenses that are not normally deductible, such as homeowners insurance, rent (if you do not own your home), home repairs and maintenance, utilities, and you are able to depreciate the space, if you own your home. There is also the advantage of shifting a portion of your mortgage interest and real estate tax from Schedule A to Schedule C, thereby lowering your self employment tax liability.

IRS Criteria to Qualify

The IRS criteria that needs to be met in order to qualify a home office space includes the fact that the space must be used exclusively and regularly as a principal place of business.

• Exclusively means just that, the space cannot be used sometimes as a spare bedroom, and other times as an office.
• Regularly means that you use the space on a consistent and regular basis, not casually or coincidentally.
• Key to defining the space as a principal place of business is supported by the fact that the majority of your administrative and management functions are conducted when using the space, in addition to obvious tasks such as meeting customers or clients.

Having another space where you conduct business does not automatically disqualify the home office space if you can support that you have met the three qualifications.

The Calculation

The typical basis used to calculate the deduction is square footage. Another equitable basis could be used in lieu of the actual square footage, but square footage is recommended. You need to measure the home office space that is used exclusively and regularly, and total square footage of the home. Expenses are then allocated to the home office space based on its square footage percentage of total space.

The next thing you need to consider is if expenses are direct or indirect. Direct expenses are amounts spent solely on the home office, and not the total home. If you painted just the home office, then this expense would not need to be allocated based on square footage, since the cost is attributable solely to the home office. In contrast, items such as mortgage interest and real estate taxes are attributed to the entire home, and are indirect costs, needing to be allocated to the home office space based on square footage.

Other Considerations

If you began using your home office space for only part of a year, keep track of the costs from the starting date, figure your square footage, and determine your direct and indirect costs from the starting date. For example, if you began using your home office in July, you would figure your square footage and look at the rent or mortgage interest and real estate taxes, utilities, homeowners insurance, repairs/maintenance, and depreciation (if you own the home), etc. from July 1 through the end of your reporting year.

A home office can be used for more than one business, and your income can be derived from more than one business location. If either of these situations pertain to you, seek advice from a qualified tax professional.

Limitation of the Deduction

The deduction is limited by the amount of business income. Depending on the amount of business loss you are reporting, your deduction will be limited. If you show a business loss prior to the home office deduction, you may be limited to only the mortgage interest and real estate tax allocated to the home office space. All other expenses, including depreciation, allocated to the home office, are carried forward to future years.

Depreciation

Be aware that the depreciation you claim on a home office is a factor in calculating the gain or loss on sale of your residence when you dispose of the property. I get several questions about this, and people seem to have the misconception that if they don’t take the depreciation deduction, they won’t have to factor it into the equation upon selling their home. This is a myth, and the IRS will calculate the deduction for you, even if you didn’t take it. So, you might as well take the deduction if you are going to claim a home office deduction.

If you have any questions, contact Seacoast Accountability at (603) 834-1271, or send an email to [email protected].

Legal Warning: The information in this blog is as accurate as I can make it. Consult me or your tax professional before using anything posted here on your tax return. Your circumstances may be different than those assumed in the postings. Please see my disclaimer.

Disclaimer: I desire to present only accurate information on this blog. However, I do not guarantee the accuracy or timeliness of the information. The information on this blog is subject to change without notice. I do not make any warranty, expressed or implied, or assume any liability or responsibility for the accuracy, completeness, or usefulness of the documents or information available on this blog. Any reference to a product, service, publication or web site does not imply an endorsement of that product, service, publication, or web site. If you have any questions or comments about any information provided on this blog, please email me at [email protected].