Home Office: Rules for Saving on Taxes

Working from home? Here are the rules you should follow for saving on taxes with a home office.  

Insuring a home office

Have you ever dreamed of working from home full time? No more commuting, no more office politics, and no more take-out dinners when you’re stuck at the office. Plus, there’s the added bonus of a potential tax deduction when you move your office into your home.

With all the perks, it’s no wonder that one in four American households—about 26 million—have places where they can work at home. According to a recent survey by CDB Research & Consulting Inc., seven out of ten home offices are used to operate small businesses.

However, according to the IRS, just 3.4 million taxpayers claimed this deductions in 2010. That deduction averaged about $2,600. Since the start of the pandemic, far more people claim a home office deduction. But more could be doing it. Many avoid claiming the tax deduction because they fear triggering an audit, while others may not be sure their offices qualify for the deduction. 

Follow these rules for claiming a home office deduction

There are strict rules governing tax write-offs of home offices. Your home office:

  1. Must be a clearly designated space. Ideally, this space is a room that you use exclusively, and on a regular basis, for your business. If you work at a table in your living room, it probably doesn’t qualify. You cannot use this space for other purposes, such as volunteer work or personal activities.
  2. Can’t be reimbursed by your employer. If it is, then you must deduct that from the total.
  3. Must be the primary place in which you conduct your trade or business or a setting to meet or deal with patients, clients, or customers. However, you do not need to do a majority of your work from your home office if your work requires you to be outside of that office such as, for example, if your business is sales, servicing, or repair.
  4. Cannot take the place of an office space your employer provides for you. Unless your employer does not provide an office space for you to use.
  5. Deduction can be taken by multiple homeowners. Taxpayers who share a home, regardless of filing status, may each claim the deduction. But they must have separate and distinct home office areas.

Here’s what the IRS wants you to know about home office deductions:

  • Employees are not eligible to claim the home office deduction. 
  • The home office deduction Form 8829 is available to both homeowners and renters. 
  • There are certain expenses taxpayers can deduct. They include mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent. 
  • Taxpayers must meet specific requirements to claim home expenses as a deduction. Even then, the deductible amount of these types of expenses may be limited. 

The term “home” for purposes of this deduction: 

  • Includes a house, apartment, condominium, mobile home, boat or similar property.
  • Also includes structures on the property. These are places like an unattached garage, studio, barn or greenhouse.
  • Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business. 

There are two basic requirements for the taxpayer’s home to qualify as a deduction: 

  • There must be exclusive use of a portion of the home for conducting business on a regular basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.
  • The home must be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home but also uses their home to conduct business may still qualify for a home office deduction.

 More IRS rules

  • Expenses that relate to a separate structure not attached to the home will qualify for a home office deduction. It will qualify only if the structure is used exclusively and regularly for business. 

  • Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction: 

  • The simplified option has a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.

  • When using the regular method, deductions are based on the percentage of the home devoted to exclusive business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.

Trends In Kitchen and Home Office Design

You can write off two kinds of expenses: direct and indirect. You can deduct 100 percent of direct expenses—those that are required for your business—including extra phone lines, Internet service, furniture, a computer and printer, and furnishings for the space you designated as your office.

Indirect expenses are calculated based on the percentage of your home’s square footage represented by your working space. Multiply the percentage by the annual amount you spend on indirect expenses such as mortgage or rent, utilities, repairs and maintenance, HOA dues, property insurance, property taxes, and other expenses you pay to maintain the property. Landscaping can even be included if you use your office to meet with clients. Finally, you can deduct the value of depreciation to that portion of your home.

Filing Taxes: Take the Office-In-Home Tax Deduction

The IRS announced a new “safe harbor” option to simplify this deduction in 2013. But, it could cost you. Instead of going through all the calculations and keeping receipts, the new deduction rules will let you simply claim $5 per square foot of your home office. The maximum write-off is $1,500 (based on a maximum of 300 square feet). You won’t be able to depreciate the part of your home used for business, though, if you go this route.

Keep in mind:

  • Taxpayers may use the safe harbor method for only one home office space. Even if they own multiple homes containing many home offices.
  • A taxpayer cannot opt for the safe harbor method if they receive rental income from the same home as the qualified business use.
  • If your employer reimburses you for your home office, you also cannot use the safe harbor option.

Millions of people who work from home are missing out on an important deduction. They are likely overpaying their taxes. The new safe harbor rules may make it easier for those taxpayers to lower their tax liability by claiming the expenses they are spending on making a living from home.

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Steve Cook is executive vice president of Reecon Advisors and covers government and industry news for the Reecon Advisory Report. He is a member of the National Press Club, the Public Relations Society of America, and the National Association of Real Estate Editors. Twice he has been named one of the 100 most influential people in real estate. In addition to serving as managing editor of the Report, Cook provides public relations consulting services. His clients include real estate companies, financial services companies, and trade associations. He works with some of the leading companies in online residential real estate.