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Does Your Home Office Meet the IRS Standards?

home office deduction guidanceBetween payroll taxes and income taxes, self-employed taxpayers can use all the deductions they can get. The home office deduction is a lucrative one. Qualify, and you can write off a portion of your rent, utilities, insurance, and repairs. It has rigid qualification standards, so make sure that your office is a good match before you attempt to claim it.

Exclusive and Regular Use

You don’t necessarily need a dedicated room to qualify for the home office deduction. The IRS allows you to claim an entire room or part of a room as your home office. However, the space in your home must be clearly defined and must be used exclusively and regularly for conducting business. That means that you can’t claim your kitchen table or living room couch as your home office. You also can’t claim a home office that doubles as a guest room, even if it’s only used by guests a few times a year.

Principal Place of Business

You can work in other physical locations and still claim the home office deduction as long as you use your home office is your principal place of business. Your principal place of business isn’t necessarily where you spend most of your day; it’s where you perform administrative and managerial work. For example, a self-employed painter that works on client sites can still claim a home office he uses for the administrative side of the business.

The exclusive use and principal place of business rules are ironclad, with a few notable exceptions. State-licensed daycares can still claim the deduction regardless of the exclusive use test. If you use a space in your home to store product and inventory, you can qualify for the deduction without meeting exclusive use standards.

Potential Deductions

If you do meet the requirements, a whole new world of deductions opens up to you. Under the home office deduction, taxpayers may fully deduct depreciation on office furniture and equipment, separate business phone lines, along with repairs and maintenance performed specifically on the home office. General home repairs, water, sewer, garbage, electricity, gas, home security systems, homeowners insurance, and rent expense are partially deductible.

Your partial deductions are calculated based on the square footage of your home office relative to the square footage of your whole house. For example, if your home office is 300 square feet and your home is 3,000 square feet, you can deduct 10 percent of the total expenses in the partial deduction list.

If you’d rather not sort through all your expenses, you can instead claim a simplified deduction of $5 per square foot in your home office, not to exceed $1,500 total.

Tips for Taking the Deduction

Tax experts no longer believe that a home office deduction is an audit trigger, so you shouldn’t be afraid to claim the deduction if you qualify for it. Still, it’s a good idea to maintain documentation. After you set up your home office, take a few date-stamped pictures as evidence in case the IRS requests more information. If you’re claiming a portion of a room, make sure your home office is clearly defined in photos and in practice. The IRS doesn’t require partial-room home offices to be portioned, but you do should be able to show where the space begins and ends.

 

patriciamanderson@gmail.com'
Patricia Poladian is an accountant and freelance writer specializing in financial topics. Her areas of expertise include personal finances, taxes, and accounting for small businesses.