As more people enjoy the benefits of working from home on either a full- or part-time basis, it’s important to understand what money-saving tax deductions are available. Keep reading and we’ll cover who can claim a home office, the basic requirements, and which expenses are deductible.
Who Can Claim a Home Office?
No matter if you run your own business from home or work for someone else, there are qualified home office tax deductions that you can claim when you use any portion of your residence in connection with a trade or business. The same benefits apply whether you own the property or rent it, and whether it’s a single family home, condo, or apartment.
What are the Home Office Requirements?
Whether you’re an employee or are self-employed, your home office must meet some basic requirements. It must pass one of the following requirements as:
- Your principal place of business
- A place you regularly do business, such as meeting with clients
- A storage space for business purposes
- A daycare facility
- A rental
Home Office Requirements for Employees
If you’re an employee, you have to meet several more requirements:
- The business use of your home must be for the convenience of your employer—not for you
- You may not rent any part of your home to your employer for business use
- You must itemize deductions on your tax return
Therefore, if your company provides you with a local office where you accomplish your primary work responsibilities—but you choose to do some work from home in the evenings—your situation doesn’t qualify.
To qualify for home office deductions as an employee, you must perform substantial work activities from home as directed and approved by your employer. Or you must be required by your employer to meet with customers, clients, or patients, for instance, at your residence on a regular basis.
Your Home Office Space
The area of your home that you designate and claim for business use is important. You must use a specific room or identifiable space as your office. The only exception to this “exclusive use” rule is when you use part of your home for business storage purposes or as a daycare facility. In these two situations, you can deduct the entire spaces used, even if they’re also used for personal purposes, like watching TV or eating meals.
Which Expenses are Deductible?
Expenses that have nothing to do with your home office, like remodeling in other parts of your home or the addition of a pool, are never deductible. However, direct expenses for the areas of your home that are used for business are 100% deductible. That might include repairs to a home office or the installation of a separate telephone line.
You can also deduct certain expenses that you would have to pay whether you had a home office or not, such as hazard insurance, utilities, real estate taxes, depreciation, and garbage pick up. These “indirect” expenses are deductible only based on the percentage of space that your home office takes up relative to the size of your entire residence.
How to Figure Your Home Office Deduction
To figure your home office deduction, you have to determine the percentage of your home that’s used for business. Divide the square footage of the area used for business by the square footage of your entire home.
For example, if your home office is 12 feet by 12 feet, that’s a total of 144 square feet. If your residence is 1,400 square feet, then diving 144 by 1,400 gives you a home office space that’s 10% of your home. Therefore 10% of the “indirect” qualifying expenses of your home (like insurance and utilities) can be attributed to business use and the remaining 90% are personal use.
For example, if your monthly power bill is $200 and 10% of your home qualifies for business use, you can consider $20 of the bill a business expense and the remaining $180 a personal expense. You will also need to separate your home office deductions from your mortgage interest deductions. Remember that 100% of the direct expenses for a home office, such as furniture, office supplies, or painting the walls are always deductible.
How Much Can You Deduct for a Home Office?
You can deduct expenses associated with a home office only up to the amount of income you earn. If your income from the business use of your home is less than your expenses, your deduction for certain home office expenses will be limited. When your qualified deductions are greater than your income, you can carry over the excess to the next tax year.
For more details be sure to refer to IRS Publication 587, Business Use of Your Home. It includes a worksheet to help you figure out your qualified home office tax deductions. If you’re self-employed you must generally report expenses for business use of your home on IRS Form 8829.
To learn more about how to cut your tax bill, be sure to grab a copy of my book Money Girl’s Smart Moves to Grow Rich. Chapter 10 tells you what you need to know about taxes, without bogging you down with what you don’t.