Are You Current on the Home Office Deduction?
With remote workers becoming more commonplace during the current gig economy, the home office deduction has become more relevant than ever.
Here are some things the IRS points out to help taxpayers understand the home office deduction and whether they can claim it:
- The home office deduction is available to homeowners and renters.
- There are certain expenses taxpayers can deduct. They include:
- Real estate taxes
- Mortgage interest
- Casualty losses
- Repairs and maintenance
- Taxpayers must meet specific requirements to claim home expenses as a deduction. Even then, the deductible amount of these types of expenses may be limited.
- The term “home” for purposes of this deduction:
- Includes a house, apartment, condominium, mobile home, boat or similar property.
- Also includes structures on the property. These are places like an unattached garage, studio, barn or greenhouse.
- Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.
- There are two basic requirements for the taxpayer’s home to qualify as a deduction:
- There must be exclusive use of a portion of the home for conducting business on a regularly basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.
- The home must be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home, but also uses their home to conduct business may still qualify for a home office deduction.
- Expenses that relate to a separate structure not attached to the home will qualify for a home office deduction. It will qualify only if the structure is used exclusively and regularly for business.
- Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction:
- The simplified option has a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.
- When using the regular method, deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.
In short, taxpayers can take this deduction if they use a portion of their home exclusively, and on a regular basis, for any of the following:
- As the taxpayer’s main place of business.
- As a place of business where the taxpayer meets patients, clients or customers. The taxpayer must meet these people in the normal course of business.
- If it is a separate structure that is not attached to the taxpayer’s home. The taxpayer must use this structure in connection with their business
- A place where the taxpayer stores inventory or samples. This place must be the sole, fixed location of their business.
- Under certain circumstances, the structure where the taxpayer provides day care services.
Certain expenses are limited to the net income of the business. These are known as allocable expenses. They include things such as utilities, insurance and depreciation. While allocable expenses cannot create a business loss, they can be carried forward to the next year. If the taxpayer carries them forward, the expenses are subject to the same limitation rules.
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