by Holli S. Powell, CPA
When you start working for yourself, it seems one of the first questions everyone asks you is “are you writing off the costs of your home office?” Or, “don’t take the home office deduction or you’ll get audited.” When I get calls from clients, this is typically one of the first areas of concern. The home office deduction can be a gamechanger to your annual tax bill, but there are some rules that must be followed.
- Exclusive Use. This is the first rule you have to investigate, and it’s also the most challenging because of its fluidity. Basically, the IRS states that, in order to deduct home office expenses, you must have an area of your home that is devoted exclusively and regularly to your business. No, you can’t deduct your kitchen, no matter how much work you do from the kitchen table. No, you can’t deduct your bedroom because you occasionally take a work phone call from there. But if you have a home office set-up, that you use only for your business, you can deduct expenses related to that. Here’s where it gets complicated—what is considered “exclusive”? If you check your personal email or talk to your kids while you’re in there, are we no longer in the exclusive category? To be on the safe side, I recommend not doing anything in the home office that you wouldn’t do in a corporate office. Note: The exclusive use test does have some exceptions (such as for in-home day cares).
- Principal Place of Business. If you can get past the exclusive and regular use tests, the next hurdle to jump is the principal place of business rule. For entrepreneurs this is fairly easy—your home office either has to be (a) the principal place where business is conducted, or (b) a place where customers or clients meet with you regularly. So, you find you can’t get any work done at home, and do most of your meetings at the local coffee shop. But your home office is where you store all your files and do your after-hours work (and it’s the primary address of your business). You can claim your home office because it is the principal place where you conduct your business. (If you are an employee, by the way, your home office is only deductible if it is set up at the request of the employer.) As always, there are exceptions to this, too—if your home office is in a detached structure (say, a carriage house or a garage apartment that isn’t attached to your home), you don’t have to meet the principal place of business rule.
- Claiming the Correct Deductions. Once you’ve met the exclusive and regular use and principal place of business tests, you can move on to figuring out the deductions. To do this, you start with the square footage of your home office divided by the square footage of your home. That percentage will guide the rest of your deductions. If you’re a renter, this is super easy—take that percentage of your rent, utilities, and renters insurance. If you’re a home owner, you have to do a little more calculating—you can claim a percentage of mortgage interest, homeowners insurance, utilities, HOA fees, and general home repairs (if they benefit the home office). Any repairs or maintenance done directly to the home office (such as new carpet or painting) can be written off in full. As a home owner, you can also take depreciation for your home office as a business expense, although when you sell your home, if you sell it for a profit, you may have to pay capital gains tax on the depreciation previously claimed.
As you can see, the home office deduction can be a major headache, but it can also be a major contributor to reducing your tax burden. I recommend consulting with a tax professional in order to evaluate your specific situation.
Disclaimer: This post is intended to be for general informational purposes about tax strategy and overall IRS tips. Please do not consider any of this consultation for your individual tax or legal needs. I urge you to consult your own tax expert with further questions. Any information contained in this post is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this document.