If a portion of the taxpayer’s house is used specifically and regularly for business purposes, they can claim a home office deduction. Employees and self-employed people can make use of this deduction. Employees must also pass an additional test for the employer’s convenience. To claim the home office deduction, you must meet some conditions set forth by the IRS:
- Exclusive and regular use
- Principal place of business
For exclusive and regular use, a specific part of the house must be utilized exclusively and regularly to conduct a trade or business. A walk-in closet or a portion of a room will also qualify. There is no need to physically divide the work area with a wall or other barrier. However, the home office must not be used for personal usage, even for a mundane activity, such as watching television or serving as a spare bedroom when the mother-in-law visits.
As for the principal place of business, the house must serve as the principal location of your business to meet clients, or to store the merchandise. Even though it is not an exclusive space, using a portion of the garage for storage results in a home office expense deduction.
The IRS is particularly strict when it comes to employee home offices. Even if your boss encourages you to have a home office and provides or loans your office equipment, the cost of a home office may not be covered. Thus, you are not eligible for the home office expense deduction if you do not have a job and permission for having a home office. Ask your boss to include a clause in your employment contract stating that you must have a home office.
- IRS offers the following two methods to calculate the space occupied by the home office:
- Simplified Method: This option makes it easy to compute the home office deduction by allowing you to multiply a prescribed rate with the allowable square footage of the office, to estimate the expenses.
- Regular Method: Taxpayers who prefer to choose the regular method, need to determine the expenses of their home office like mortgage interest, utilities, insurance, and depreciation. In this method, deductions are proportionate to the percent of your home devoted to home office usage.
What Space Qualifies for a Deduction for a Home Office?
A home office space must be utilized regularly and solely for business operations in order to be deemed deductible. It is feasible to designate one corner of a room as a workspace, but it must be utilized solely for that purpose. The home office, regardless of size, may not be used for anything other than business.
The amount of the home office expense deduction is determined by the percentage of total space in the home that the office takes up. Suppose an office takes up 25% of a house. In such cases, the individual can deduct a portion of home office-related expenses such as utilities or real estate taxes, as business expenses. If the taxpayer is a tenant, a portion of the rent payment can be expensed as well.
Is it Possible to Deduct Your Office’s Contents?
When it comes to the finer points of establishing what expenses at the workplace are deductible, it’s best to obtain advice from a tax specialist. While the home office itself may be tax-deductible, not everything within is, and determining which can be difficult.
In order for an expense to be considered deductible, it must be ordinary and necessary. To elaborate this further, the expense must be essential to run the business. And, the expense must be ordinary or common to that of other similar enterprises in the same industry.
For offices that merely take up a portion of a room in the house, the regulations are sometimes more stringent. In such situations, make sure to only disclose products that are utilized only for business purposes.
When it comes to business deductions, be cautious and don’t get too greedy. Suppose you are too liberal and try to deduct items such as televisions or plants that are unnecessary for maintaining a home office. In that case, you may end up inviting an audit from the IRS.
In a nutshell, a home office space must be utilized regularly and solely for business operations in order to be deemed deductible. It is feasible to designate one corner of a room as a business area, but it must be utilized entirely for that purpose. Regardless of size, a home office may not be utilized for anything other than business.
Get a list of all the home office tax deductions you are eligible for as a freelancer or a working professional. Utilize this information to make the most of your income and taxes, without wasting a single penny extra on taxes.