Tax Guide

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Deductible Home Offices

Today, working from home is increasingly an option with many companies – at least from time to time. The home office is also often used by the self-employed entrepreneur, who may not want the expense and hassle of maintaining an office separate from his home; instead, home becomes office.

Let's look at how to get a deduction for a home office.

The Ground Rules

Whether you’re using your office space at home as a self-employed person or as an employee, you must meet two basic requirements:

  1. You must regularly use part of your home for conducting business. If you regularly use an extra room to run your business (or do work for your employer), you can take the home office deduction for that room.
  2. You must be able to show that you use your home office space substantially and regularly to conduct business. But it doesn’t have to be your principal place of business, or the only place you meet clients, customers or patients.

Generally, deductions for a home office are based on the percentage of the home devoted to business use. So whether the office space at your home is a spare room, a remodeled garage, or a free-standing building, you need to figure out the office space as a percentage of the entire home.

Extra Hoops for Employees

If your home office is for doing work for your employer, there are extra considerations. Business use of your home must be for the convenience of your employer – not you.

And you can’t rent your home office space to your employer and also deduct the use of that space to perform work as an employee. You can’t have both the rent income and a deduction.

Finally, for employees, the home office deduction is an itemized deduction, and is subject to the 2 percent rule, meaning you can only deduct the amount exceeding 2 percent of your adjusted gross income (AGI). For the self-employed, the deduction is subtracted from business income on Schedule C.

Two Ways to Figure

There are two ways to figure the deduction:

1. The Simplified Option is a straightforward way to figure the amount of your home that you use for business. You just need to know the square footage of the area of your home used for business, and the total square footage of your home.

This option multiplies the allowable square footage of the home office by a prescribed rate (usually $5) to get the deduction amount. If your home office is 100 square feet, multiplying that by $5 gives you a deduction of $500. The maximum square footage allowed for the Simplified Option is 300 square feet, so the maximum deduction with this option is $1,500.

2. The Expense Option uses the actual expenses incurred in the operation of the office space in your home. The IRS splits expenses into three categories:

  • Direct, which are related only to the business part of the home
  • Indirect, which are for keeping the entire home up and running
  • Unrelated, which are expenses for parts of your home not used in business

Using the Expense Option allows for expenses such as depreciation on the home, real estate taxes and mortgage interest.

IRS Publication 587 has a worksheet for figuring your deductible expenses.

Entering on Your Return

When you do your taxes with 1040.com, our Form 8829 screen makes both methods much easier than ever before. For the Simplified Option, just enter your office square footage and the home’s total square footage, select the "safe harbor method," and we'll do the rest.

When you choose the Expense Option, you get extra boxes for your direct and indirect expenses – even depreciation. Once the expenses are entered, we do the calculations. It’s that easy.

Day care providers will have slightly different requirements for the deduction. To see day care qualifications for the office in home deduction – or for answers on the options for figuring the deduction, take a look at IRS Publication 587.