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Home Office Deductions

Posted by Craig M. Morgan | Mar 18, 2018 | 0 Comments

Everybody works from home.  It is convenient and can save lots of money.   And, we all know that controling expenses is critical to a small business.  This article by Hunter Widener, tells how you can deduct expenses attributable to your home-based office.     

"Entrepreneurs, small business owners, and those who work at home may be considering utilizing the home office deduction when they file their taxes this year. This deduction can be advantageous, but there are several requirements that must be met before you can claim it as your own. 

The Internal Revenue Service (IRS) has exacting guidelines that your business must meet in order to qualify for the home office deduction. For starters, let's address the word "home." As far as the IRS is concerned, "home" can refer to your house, apartment, condominium, boat, or even mobile home. After establishing that your "home" qualifies for the deduction, you must also meet certain tax law requirements. In order to claim a home office deduction, your business must adhere to the following:

1. Regular and Exclusive Use. According to the IRS, the part of your home that you claim for business must be used exclusively for business purposes and on a regular basis. If you are a lawyer, for example, who does paperwork at night in your living room where the rest of the family also socializes, then you will not qualify for the deduction. However, if you have a spare bedroom that has been converted into a home office, which you use regularly for business purposes only, the room will most likely satisfy the requirements. 

If you use part of your home for business storage purposes, then you may not have to meet the "exclusive" part of this rule. You can claim business use if you fulfill all of the following: 1) Your trade or business is selling products wholesale or retail; 2) You store inventory or product samples in your home for your business; 3) Your home is the only fixed location of your business; 4) Your storage space is used for storage on a regular basis; and 5) The space you use is suitable for storage and can be identified as a separate space. For example, if you sell mechanical equipment out of your home and use half of your attic for storage, then you may satisfy these requirements.

After fulfilling the first requirement, you must also meet at least one of the following stipulations:

2. Your Principal Place of Business. If your business is 100% home-based, then you should be all set. However, if you have more than one location for your business, your home must be the only place available to you for performing the administrative and managerial aspects of the business. But those who have primary jobs and secondary businesses can still meet the requirements. For example, if you are employed as a teacher and run your own jewelry business from your home, you may still qualify.

3. Where You Meet with Customers, Clients, etc. If you regularly meet with customers, clients, or patients in an area of your house that is exclusively used for this purpose, then you may fulfill this requirement.

4. A Separate Structure. A building on your property used only for business would meet this condition. This means that if you are an artist, for example, and you convert a shed into a studio, then you would probably qualify. Once again, the rule remains that this structure cannot be used for other purposes, such as storing garden and lawn equipment.

But what if you work at home on projects supplied by your employer? In order to qualify for the deduction in this scenario, your work at home must be for the convenience of your employer. This means that if your employer provides you with a place to do your work but you choose to work at home, then you do not qualify. Such an example would be for your convenience and not the employer's. Also, in order to qualify for the deduction, your employer may not provide you with additional compensation, such as rent, for your home office space.

Safe Harbor Method of Calculation

 

In 2013 owners of home-based businesses and some home-based workers had the option of using a new safe harbor method when calculating their tax deduction for the business use of their home, or home office deduction.

The option provided eligible taxpayers with an easier way of claiming the home office deduction under Section 280A of the Internal Revenue Code. Under the old rules, taxpayers were generally required to fill out Form 8829, Expenses for Business Use of Your Home. Completing the form often involved complex calculations of allocated expenses, depreciation, and carryovers of unused deductions. 

But taxpayers claiming the new optional deduction now complete a streamlined form in which they simply have to multiply the square footage of the area of their home used for business purposes by the prescribed rate of $5 per square foot up to 300 square feet, or $1,500 per year. 

Taxpayers, however, have to continue to satisfy the existing criteria for claiming the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business, and the limit tied to the income derived from the home-based business. For a full explanation of eligibility requirements and tax deductions for your home office, see the IRS Publication 587, Business Use of Your Home. 

While homeowners using the newer safe harbor method cannot depreciate the portion of their home used in a trade or business, they are permitted to claim allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A. These deductions do not have to be allocated between personal and business use. Meanwhile, business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are fully deductible.

The home office deduction involves many rules, but if you qualify, it can be well worth your time and effort. Be sure to consult your qualified tax professional for more information on the safe harbor method and your home office situation."

Craig M. Morgan, Esq., Managing Attorney at Providence Law 

Contact Providence Law for more information about marketing law. 

Providencelawcarolina.com704.412.9450

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Providence Law serves clients throughout NC.

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About the Author

Craig M. Morgan

Craig Morgan's practice areas include business and corporate law, franchise law and general corporate counsel. He has represented a variety of businesses including franchise businesses and independent, privately held companies. Craig has represented clients in negotiations and ...

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