Home Office Deduction

Home Office Deduction

The home office deduction is one of the most common deductions found on a tax return and are found on millions of returns per year. A taxpayer is allowed to deduct expenses related to business use of a home. To qualify you need to meet one of the following three tests:

1.) Exclusive and regular use as your principal place of business

2.) A place for meeting with clients or customers in the ordinary course of business

3.) A place for the taxpayer to perform administrative or management activities associated with the business, provided there is no other fixed location from which the taxpayer conducts a substantial amount of such administrative or management activities

When taking a business use of home deduction, the IRS considers two factors: 1.) does the taxpayer in question spend more business-related time in the home office more than anywhere else and 2.) Is there significant revenue generating activities generated from the home office? If the answer to both of these questions is not yes, you may not be entitled to a home office deduction.

There are two methods used for the home office deduction: simplified method and regular method.

Simplified Method-Beginning in the tax year 2013, taxpayers were granted the option to deduct their home office with a simpler method. Under the simplified method taxpayers are able to deduct up to a maximum of 300 square feet of their home office at a rate of $5 per foot. Thus, this deduction is capped at $1,500 per year.This is beneficial as there is no depreciation recapture on the sale of your home.

Regular Method-This method involves taking your actual costs associated with operating your home and allocating a portion of that to your home office expense. These expenses that are allocated (direct business expenses, and indirect business expenses) are outlined below:

There are 3 different categories of home office expenses:

 Direct Business Expenses-these are costs for running your home office that only pertain to that office. (example: painting or repairs to ONLY your office)

Indirect Business Expenses-These are expenses related to running your entire home (mortgage interest, insurance, utilities, general repairs)

Unrelated Expenses-these are costs that do not relate to your home office at all, and are non-deductible.

Another benefit is that a home office increases your business miles because travel from your home office to any business destination is now deductible. This includes picking up supplies, meetings, etc. A good app that I recommend for tracking your business miles is called Everlance (download on Android or Apple Store).

Please feel free to reach out if you need further guidance regarding this deduction.