If you work from home, you may be wondering whether you can deduct your office space from your federal tax returns. The short answer is: Yes, absolutely! But the IRS has very specific guidelines for what is and isn’t deductible with respect to home offices. Here are some tax issues to consider if you work from home.
Regular and Exclusive Use
Generally, you deduct the square footage of your office space as a percentage of your entire home. The IRS is very clear that this space must be used regularly (not sporadically) and exclusively for conducting business. So, occasionally setting up a TV tray in your living room while the kids are watching cartoons wouldn’t likely qualify. One exception to this is daycare service providers who use parts of their home for both business and, in off hours, pleasure.
Typically, a home office is a room in your house. Or it could also be an unconnected structure, like a studio, garage or barn. But a home office can also be a separately identifiable space, like a corner of a loft or part of an attic, which doesn’t need to be marked off by a permanent wall or partition. Square footage used for storing inventory or product samples may also be included in the calculation of the home office deduction.
Principal Place of Your Business
The IRS requires you to prove that you use the office space in your home as your principal place of business. If you do business outside your home, but also use your home “substantially and regularly to conduct business,” you may qualify for a home office deduction.
What Can You Deduct?
The home office deduction allows you to claim all or a portion of the expenses associated with your home office. So, for example, you can deduct a portion of your utilities, homeowners insurance, security system, real estate taxes, home mortgage interest and depreciation on your home.
You can also deduct the full amount of expenses you incurred directly related to the specific office space. Painting the room, for example, would be fully deductible. Of course, as part of your general business deductions, you can also claim any other qualified expenses you have in the course of doing business, like office supplies and equipment.
Home Office Deduction Options
Whether you’re self-employed or employed by someone else, you may be able to claim a home office deduction, though each category has different filing guidelines. Tax filers claiming the home office deduction can use either the regular method, which asks filers to report actual expenses, or a simplified method, which allows filers to claim a standard deduction of $5 per square foot used, not to exceed 300 square feet.
An experienced tax accountant can help you gain all the home office deductions to which you’re entitled on your taxes. Make an appointment as early as possible, and give your accountant plenty of time to properly prepare your returns.