Requirements to take a deduction for a home office
Work at Home? Do You Qualify to Take a Deduction for a Home Office?
Many people whose small businesses qualify them for a home office deduction are afraid to take it because they've heard it will trigger an audit. That is not true. Changes in the rules in the late 1990s made it easier for people who work out of their homes to qualify for these deductions. If you qualify, take the deduction.
If you are an employee, you can only deduct the home office if it is for the convenience of your employer. If your employer wants you to work at home to save the employer money on office space, you can claim the home office deduction. It's not enough that the home office is helpful, it must actually be required by the employer. If you are permitted to work at home because you begged or pleaded for the privilege, that is not for the convenience of the employer. That is for your convenience, and you don't qualify for the deduction.
If you are self-employed, in order to qualify to deduct a portion of home-connected expenses such as utilities, rent, depreciation, homeowner's insurance, mortgage interest, real estate taxes, maintenance and repairs, you must look at six requirements to help you determine your deduction.
1) You regularly use part of your home exclusively for a trade or business. You must use your home as your principal place of business, or you meet patients, clients, or customers at home, or you use a separate structure on your property exclusively for business purposes.
The requirement that part of your home be used exclusively for a trade or business is a tough one. Exclusive use means that you use a portion of your home only for business. If you use a room or part of your home for business and for personal use, you don't qualify for the deduction. If your home office doubles as a guest room, that's not exclusive use for business.
If you balance your personal checkbook at the desk in your home office does that mean you fail the exclusive use test? Turbo-tax reports that one tax-payer lost the home office deduction because a picture of her desk showed that the dog's water bowl was under her desk. Don't push the envelope - if you take this deduction make sure the space for which you take deductions is used only for your business.
2) For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.
3) The amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.
4) There are special rules for qualified daycare providers and for persons storing business inventory or product samples.
5) For sole proprietors, if you qualify for the home office deduction, you must figure the amount of your deduction on IRS Form 8829, Expenses for Business Use of Your Home. Deduct 100% of expenses that are directly related to the home office. This can include painting, cleaning and the premium for a home office rider on your homeowner's insurance policy. Ditto for your office telephone line and utilities if you have separate hookups.
You are also allowed to deduct a percentage of indirect expenses that relate to your entire residence. These include mortgage interest, real estate taxes, condo fees, rent, depreciation (over 39 years), utilities, security, garbage pickup, maintenance, repairs, insurance, snow removal, and so on.
What percentage of these expense can you deduct? If you follow the instructions for Form 8829, it will lead you through a square footage analysis. Count only living space in figuring the percentage (not your garage, unfinished basement or covered patio). Also, if you have a bathroom adjoining your office that's never used otherwise; treat the square footage as part of your office.
Despite what the instructions for Form 8829 say, you can also use any other "reasonable method" to compute the business portion for indirect expenses. For example, you can count the number of rooms in your house and divide. If you have 10 rooms that are generally the same size and you use one for the business; you can deduct 10% of your indirect expenses. The office doesn't have to be a whole separate room. It may be just a defined space that is used for business.
6) If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer. As an employee you must itemize deductions to claim a deduction for business use of the home. You also generally have to file Form 2106 if you claim deductions for any job-related travel, meals or entertainment, or your employer paid for any of your job expenses that are deductible as itemized deductions.
For more information see IRS Publication 587, Business Use of Your Home.
You can't take more deductions for a home office than you have income generated by the business. Thus, you cannot use the home office deduction to generate a tax loss. Any unused losses can be carried over to the next year.