Whether you started working from home since the pandemic or always had a home office, you may qualify for some tax deductions.
Suppose there are areas in your home regularly and exclusively used for business. In that case, you may consider them for a home office deduction. It also permits use for:
- Product samples
- Inventory storage
The IRS provides two options for taking home office expense deductions: Simplified and Regular Methods.
Two Accounting Methods: Simplified vs. Regular
The simplified method does not require extensive record keeping. Instead of tracking actual expenses, you use a rate determined by the office's business square footage.
With the regular method, you would track all business expenses allotted to your workspace. They can include:
- Mortgage interest
- Utilities (phone, electricity)
- Depreciation of your home
- Casualty losses
If you use the whole or part of a room, you will figure that square footage into your dedicated home office usage.
Regular and Exclusively Used Space
In both cases, the IRS requires that you regularly and exclusively use workspace work.
It cannot be used for anything domestic. The IRS is very nitpicky about this requirement. If you keep your ironing board on the back of your office door or kids' toys in the closet, it will violate the rule, and they will deny the entire claim.
Principal Place of Business
Also, your workspace must be your principal place of business. Even if you also work offsite, your home can qualify if you hold client or patient meetings in your home office.
The rule also provides for using standalone structures on your property as an office. Barns, sheds, studios, and garages can qualify as long as you use it exclusively and regularly for business.
On the whole, you will need to know the percentage of your home that you dedicate to the business. However, if you use your home office for business activities that are appropriate and helpful, it fails to meet the definition for a deduction.
Calculating Home Use Portions
Your deduction amount can depend on the part of your house that is used exclusively for business.
For example, suppose you work in a room that is 10 feet by 12 feet. That space has 120 square feet of usable area. Your house has 2,000 total square feet. The business area divided by the total square footage (120/2,000) equals 0.06 or 6%. Therefore, You can claim 6% of your expenses. That percentage applies to utilities and other deductible expenses.
If you work for your employer from home, you will face additional requirements.
Not only must you meet the regular and exclusive use and principal place of business mandates, but the business use must be for the employer's convenience. Also, you're prohibited from renting a portion of your home to your employer, then using that rented portion to work for your employer.
If the employer cannot provide you with a place to work, like a remote phone agent, then you may qualify. But, do not mix anything personal into your work area.
Some employers offer the choice to work in the office or from home. If that's the case, you will not qualify because they supplied you with a workplace.
A Word of Caution Claiming Home Office Expenses
The IRS takes the "exclusive and regularly used space" provision of this deduction very seriously. It can often trigger an audit because taxpayers frequently abuse it. Investigative agents have been known to drop by unannounced.
Therefore, make sure your home office expenses are bulletproof. Keep impeccable records, written and photographic.
Office decorations must not suggest you engage in personal activities in your home office. Leave the desk toys in the living room.
If you keep a book collection, make sure they are all business-related. Personal or unrelated fiction books should be stored elsewhere.
When it comes to financial records, only keep the business finances in your home office. Set up your personal financial records elsewhere, or remove them altogether.
Never print personal items from your work printer, even if it's after work hours. Remember, the office space must be used exclusively for work, even in the middle of the night.
The law is very strict about no personal use of your business space. If you can prove it's 100% work-related 24/7, feel confident in claiming it.
The taxpayer holds the burden of proof. Ask yourself: how can I prove that I don't use something for personal reasons occasionally? If anything in your home office cannot hold up to the highest level of scrutiny, consider skipping the home office deduction.