When people ask, I tell them that one of my favorite things about being a freelancer is that I can work from anywhere as long as I have my computer, cell phone and an internet connection. However, most of my work is done from the comfort of my home office.
Each year when I prepare my taxes, I still get a bit nervous about taking the home office tax deduction. I'm confident that I'm entitled to it, and the IRS has never questioned whether I'm eligible for the deduction, but I've heard many vague threats, warnings and horror stories about home office deductions.
The week of Oct. 8 is Improve Your Home Office Week, so I decided to take a fresh look at the home office deduction to confirm that I'm both eligible for the tax deduction and that I'm maximizing the deduction.
The BasicsThe tax deduction for the business use of your home is often called the home office deduction. The deduction has different requirements for people who are self-employed and people who work for others. Nonetheless, the basic requirement is the same: To deduct expenses in connection with the business use of a home, the space must be used on an exclusive and regular basis for trade or business purposes.
This "exclusive test" looks at the use of a space during the entire day. For instance, even if you use a specific part of your home for business purposes from 9 am to 5 pm on Monday through Friday, but your child uses the space for doing homework in the evenings, then it's not being used exclusively for business. Similarly, it's not being used exclusively for business if you use the space to pay your personal bills in the evenings or the weekend.
Who and What Qualifies?To qualify for the deduction, part of your home must be used regularly and exclusively as:
- The principal place of business for your trade or business, such as if your self-employed
- The place where you meet and deal with patients, clients or customers in the normal course of your trade or business
- In connection with your trade or business, if you use a separate structure that is not attached to your home
In addition to those requirements, if you're an employee, you can take the deduction only if:
- Your business use is for the convenience of your employer, and
- You don't rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer
For example, if you are a teacher, you're required to teach at the school and to grade papers, and the school provides you an office to perform those duties. The school does not require you to work at home. Suppose, however, that you like to use an office you've set-up in your home and you use it for grading papers and making your lesson plans. You can't take the deduction because the business use of your home isn't for the school's convenience, since the school doesn't require you to work from home.
You can take the deduction if you use a separate, free-standing structure on your residential property. For example, if you're self-employed and you keep supplies or inventory in a detached garage, you can deduct the expenses of the garage, such as maintenance and even depreciation.
How Much of a Deduction?In general, you can only deduct the portion of expenses that apply specifically to your home office.
For example, suppose your home is 1,000 square feet and you use 100 square feet as your home office. You can take a deduction of 10% of your whole-house expenses (1,000 divided by 100). So, if your homeowner's insurance is $1,000, then $100 ($1,000 x 10%) can be deducted.
Some other examples of deductible expenses include:
- Depreciation and rent
- Mortgage interest
- Real estate taxes
How Do I Take the Deduction?If you're self-employed and you normally file Schedule C with Form 1040, you need to complete and attach Form 8829. Most employees have to itemize deductions on Schedule A with Form 1040 to claim a deduction for the business use of your home, along with other work-related expenses you may have.
Related Links:
