Regular and exclusive use. That is the first hurdle to claiming the home office deduction. No matter what, if you don't use your office regularly and exclusively as an office the deduction is not available.
Using your office "regularly" is pretty vague. While there is no clear definition by the IRS of what "regular" means, be prepared to show you use it regularly. Using your office "exclusively" is easier to define. If you do your work at the dining room table, that is not exclusive. Have a space that is yours, and make sure it is only used for your business.
Your office doesn't even have to be a room. A space or a portion of a room is acceptable. In a large room your office can be a 5'x8' corner. Just be prepared to show what your space is and how you use it.
The second hurdle claiming this deduction is that the home office must be your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.
This deduction is really intended for self-employed individuals that work from home. Even so, if you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. In addition to meeting the tests discussed above, your business use must be for the convenience of your employer, and you must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.
Whether you are self-employed or an employee, if the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.
Now that we have that out of the way, lets talk about how to calculate the deduction.
Under the regular method, deductions for a home office are generally based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities. This method includes certain costs that you paid for your home. The amount you can deduct usually depends on the percentage of your home used for business. While this method was long-beneficial, the record-keeping requirements were cumbersome.
Starting with 2013 returns a new, simplified method became available. If you use the simplified option, multiply the allowable square footage of your office by a rate of $5. The maximum footage allowed is 300 square feet. That's it! That's all you need for the deduction. This option will save you time because it simplifies how you figure and claim the deduction. It will also make it easier for you to keep records. While the record keeping is simpler, this option does not change the rules for claiming a home office deduction.
Under either of these methods, however, there is a limit. If your gross income from the business use of your home is less than your expenses, the deduction may be limited, so as not to cause a loss by virtue of your home-office expenses.
In years past the home-office deduction was considered by many to be a red flag. The deduction was abused by those looking for what they thought was an easy way to reduce taxable income. Even with that history, if you meet the requirements to claim the deduction there is no reason to skip the deduction. As long as you document your expenses and keep adequate records the deduction can be an easy way to save on taxes.
Want more information? See our new blog article, "Deducting Home Office Expenses," or contact us. We can help you determine if this deduction is right for you.
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