Claim Home Office Deductions

Business owners and employees may qualify for a home office deduction on their personal tax returns. The deduction can reduce the total taxable income on a taxpayer’s return. You must use a specific area of your home exclusively for business. The taxpayer must regularly work in that area of the home to qualify for the deduction. If you do qualify, you may be able to deduct a portion of your home’s mortgage interest, utility costs and other expenses.

Steps

Qualifying for a Home Office Deduction

1. Meet the IRS definition of a home office. To claim a deduction for your home office, the IRS requires that you use a portion of your home "exclusively and regularly" for your principal place of business. That home location can also be the place you routinely deal with customers, clients or patients. For the purposes of the IRS, the area used as your home office does not have to be furnished as an office. You can use it for storage, as a laboratory, showroom or day-care center.
   • The business portion of your home does not need to be physically attached to your living quarters for you to qualify for the deduction.
   • Assume that you run a retail business from home, and you use part of the home to store your inventory. Business owners in this situation are able to use a portion of this space for personal use and still qualify for the home office deduction.
   • If you run a child-care facility from your home, the portion of your home that you use for child care is exempt from the exclusive use rule as well. Note, however, that you can only deduct expenses incurred during the hours you care for children.
2. Consider the available locations for your work. A person who works for someone else can claim a home office deduction in some instances. If you work from home for the employer's convenience, you are able to take the deduction.
   • If you telecommute because your employer can't provide you with an office, you may take the home office deduction. You’re working at home for the convenience of the employer.
   • On the other hand, if you telecommute because you find it easier to work from home than to use the office your employer provides you, you probably can't claim the deduction.
   • You can't claim a home office deduction by renting your home to the company you work for and then working from the rented portion.
3. Use the simplified option. If you qualify for the home office deduction, the IRS offers a simplified method to calculate the dollar amount of your deduction. This method eliminates the need to track and file many of your actual home expenses.
   • You are allowed to deduct a flat $5 per square foot for your home office area. You can deduct the square footage up to 300 square feet.
   • The amount is deducted on schedule A of your personal Form 1040 tax return.
   • If you choose the simplified method, you cannot deduct a percentage of the actual mortgage interest, utilities and repair costs that relate to your home. If you estimate that your actual costs are higher, you should consider using the normal home office deduction method.

Determining How Much You Can Deduct

1. Figure out how much space your home office occupies. Your home office deduction is limited by the percentage of the home is used for business purposes. If your office occupies 25 percent of your total home space, or example, you can claim no more than 25 percent of household expenses.
   • Assume that the mortgage interest, utilities and repair costs that relate to your home add up to $15,000 for the year. If 10% of you home's space was used for business, your home office deduction would be $1,500.
   • An expense that benefits only your business, such as remodeling a bedroom into an office, is a "direct" expense that is fully deductible.
   • An expense that benefits your entire house as well as your home business, such as putting a new roof on your house, is an "indirect" expense. The indirect expense is partially deductible, based on the home office portion of your home.
   • An expense that benefits only your living quarters, such as enlarging the master bedroom closet, is not deductible.
2. Compute your deductible mortgage interest and real estate tax expenses if you own your home. If you rent, you can deduct what you paid in rent. These amounts are restricted by the proportion of your home that is used as your home office.
   • Real estate taxes include only what you pay to a taxing authority, such as a county assessor's office. You do not include assessments for public works projects that benefit you. If your billing statement showed $3,000 in real estate taxes and a $1,000 assessment, only the $3,000 would count toward the home office deduction.
   • Mortgage interest is deductible on both first and second mortgages on property. You can also deduct home equity loan interest, but the total dollar amount of the deduction is limited. If you paid interest of $5,000 on a first mortgage and $2,000 on a second mortgage, for example, the entire $7,000 would count toward your home office deduction.
   • Mortgage interest and real estate taxes can be listed as itemized deductions on schedule A if they don't qualify as home office deductions. All taxpayers have the ability to deduct mortgage interest and taxes on schedule A.
3. Go over the limitations of your home office deduction. You cannot deduct 100% of your home’s depreciation as a home office expense. There are also home deduction limits based on your business income.
   • You can't deduct what you paid to buy your home. Instead, the cost of your home is the amount used to depreciate the property.
   • If you choose to use a method that allows for depreciation expense, you will gradually expense the original cost of your home using the home office deduction.
   • Say, for example, that you pay $300,000 for your home. You depreciate the entire value of your home over 30 years, or $10,000 per year.
   • Assume that you’re able to deduct 10% of your home as a home office deduction. You would deduct ($10,000 multiplied by 10% = $1,000) in depreciation expense as part of your home office deduction each year.
   • Figure your total income for the year. You can only claim home office deductions up to the amount of business income for the year. If your business expenses exceeded your business income, you can carry over the excess deductions to the following year's taxes.

Claiming Your Home Office Deduction

1. Figure the deductible expenses involved in running your home. Regardless of whether you own or rent the home, you can deduct expenses for insurance, utilities, and repairs. These rules also apply to apartments and condominiums.
   • You can deduct the percentage of homeowner's insurance equal to the space your home office occupies, but you cannot include riders that relate to your home office or business insurance.
   • You can deduct the business percentage of what you pay for utilities such as heat and electricity, as well as services such as garbage collection, security and cleaning services.
   • You can also deduct specific telephone charges related to your business on your primary telephone landline and cellular phone, as well as the cost of a dedicated business line such as a fax line.
2. Calculate any casualty losses you may have. If your home office is damaged by criminal act or disaster, you can deduct some of the casualty losses. You must file a timely insurance claim. The taxpayer can deduct only the portion of the loss that your insurance reimbursement does not cover.
   • You can estimate the reimbursable amount if it hasn't been determined by the time you file your taxes. Assume, for example, that you estimate your casualty insurance reimbursement to be $50,000 for the year.
   • If your actual reimbursement is higher than the estimate, the difference is considered taxable income to you. If you were reimbursed $70,000 from the insurance company, $20,000 ($70,000 - $50,000) would be considered taxable income to you.
   • You can amend your original tax return to correct the reimbursement amount you received. In this example, you would change the reimbursement amount from $50,000 to $70,000. This would eliminate the additional $20,000 in taxable income.
3. File your return. Report the home office deduction on the correct tax form. You may report the deduction on schedule A or schedule C of your personal return, depending on your circumstances.
   • If you're self-employed taxpayer, you include the home office deduction on schedule C of your personal Form 1040 tax return. This schedule reports profits and losses for a business.
   • File schedule A if you're claiming home office expenses as an employee of someone else. Use schedule A and list the expenses as itemized deductions on your personal Form 1040 tax return.
   • Consult with an accountant regarding home office deductions. These deductions receive a high level of scrutiny from the IRS. These deductions have been an area of potential taxpayer abuse in past years. Work with an accountant to file your return correctly.

Related Articles

• Deduct Closing Costs on Taxes

Sources and Citations

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See also

• Get Work Done in a Home Office
• Organize Your Home Office

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