Over 25 Million Americans work from home, but only 3.4 Million claim the home office deduction. Whether you’re a homeowner or a home-renter, if you work at home or use your home for business at all, you may be eligible to claim a home-office deduction this tax season.
There are some new home-office deduction rules that apply. But before we dive into those, let’s go over the requirements for claiming the tax deduction.
If you use your home for business, in order to claim a home-office deduction, the home–office:
1. Has to be used regularly and exclusively for business
2. Has to be your principal place for business
What do these two requirements mean?
1. Has to be used regularly and exclusively for business. You must use the area on a regular basis as your place for doing business and the area must be used exclusively for that business. It doesn’t need to be an entire room, but it does need to be an area that has clear boundaries (for example, the desk set-up in the corner of a room). Merely working at your kitchen table filing paperwork because you couldn’t get all your work finished in the office does not qualify.
2. Has to be your principal place for business. The rule of thumb here is that no substantial portion of your business is carried out in another fixed location (i.e. office). If you’re having face-to-face meetings at home or use it for the administrative portion of your business, even if you carry out business elsewhere, you can still qualify for the deduction for that room that is regularly and exclusively for business (for example with a carpenter or an interior designer who spends most of their time in other people’s homes).
- If you have a separate, freestanding building – a studio, barn, garage behind your house, that too, can qualify.
- For Freelancers: You may have a full-time job at an office, but freelance on the side (writer, blogger, entrepreneur). Good news: you can still qualify for their business as long as it is regularly and exclusively for business and used as your principal place of that business.
- If you are an employee and you use part of your home for business, you also may qualify for a deduction, but, in addition to the two tests above, you also have to prove that: 1) it is for the convenience of the employer (there are no hard and fast rules for that) and 2) you must not rent any part of your home to the employer and use the rented portion to perform services as an employee for that employer
There are 2 methods for calculating the home-office deduction.
1. Simplified method. Effective, January 1, 2013, this is a new simplified option (outlined methodology in detail in IRS Revenue procedure 2013-13) which significantly reduces the record keeping burden by allowing you to multiply a proscribed rate by a percentage of square footage used by the home-office. The proscribed rate is $5 per square foot for a maximum of 300 square feet or $1500 dollar of tax savings.
2. Regular method. This method has been around for many years, whereby you must determine the actual expenses for your home office. The expenses that can be allocated towards home office use can include things such as insurance, light, heat, power, repairs, depreciation, real estate taxes, and mortgage interest.
We suggesting calculating both ways to see which method will result in a bigger deduction.
For more information, call us.