Lowering Your Tax Bill With the Home Office Deduction

If you’re looking for an additional deduction to help lower this year’s tax bill, consider the home office deduction. Your home office doesn’t necessarily have to be an entirely separate room. Even a section of a room can often qualify for the deduction, but the space has to be your principal place of business.

What Qualifies as a Home Office?

The IRS has a fairly straightforward test to help you figure out whether your office qualifies for the home office deduction. The area you claim has to be used exclusively and regularly for your business or it needs to be a place that you meet with patients, customers, or clients. It can be inside your home or in a separate, detached structure, e.g. a garage.

The IRS says that exclusively means you only use the room or area for work. If you use the area for something else, say relaxing and watching television, it probably doesn’t qualify for the home office deduction. For example, your dining room table doesn’t qualify if you also use the table for eating meals with your family.

If you’ve only used the home office once or twice this year for your business (irregularly) it probably doesn’t qualify either. But, if you use it a few hours a week or daily to carry out your business or meet with clients, then you’re more likely to qualify.

The IRS may not allow you to take a home office deduction if you have an office at your employer’s place of business, but you work at home sometimes for your own convenience. However, you may be able to take the home office deduction if you work at home because your employer doesn’t have space for you to work at their place of business.

What Can You Deduct?

The home office deduction lets you deduct part of your taxes, mortgage interest, rent, utilities, insurance, depreciation, repairs, casualty losses, and maintenance. The IRS allows you to deduct all the expenses attached specifically to your home office as well as a percentage of the expenses for your whole house. For example, if your home office is 10% of your home’s square footage, you can deduct 10% of your home house’s expenses: the mortgage or rent, utilities, etc. You’ll need to know the square foot measurement of the space used for your home office and the measurement of your entire home.

You cannot deduct expenses for parts of the house that were not used for your business. For example, you may not be able to deduct kitchen repairs when your home office is located in another room.

You can only deduct the expenses for the part of the year that you used the home office. So, if you didn’t start the business until September 1, you can only consider the expenses for the last four months of the year to calculate your allowed home office deduction.

There’s a catch: you can’t deduct more than the gross income received from the use of your home office. If your home business operated at a loss, you can’t take the home office deduction this year.

Recording Keeping Tip

Keep proof of your home office and expenses with your tax documents. You don’t have to send it with your tax return, but you can keep it with your tax records to show in case of an audit. If you have a blueprint of your home, pencil in the area where your home office is located. You can also take a picture of the space. Use a room divider or tape the floor to show that the area is clearly separate from space where personal activities may occur.

Always Seek Professional Advice for Help

Tax preparation software typically asks all the necessary questions to be sure you qualify for the home office deduction. Always ask a tax professional for advice on taking the home office tax deduction if you have any questions about deducting home office expenses.

Source: IRS.gov Publication 587