Are Work from Home Expenses Tax Deductible? 20 Tips
Are Work from Home Expenses Tax Deductible? 20 Tips
Working from home has got its perks as not only do you get to do the work you love and earn a decent wage, you also don’t have to commute to an office as covered over at runrex.com. In addition to that, the IRS also allows you to take a home office deduction on your tax returns as well. Through the following 20 tips, this article will look to outline how you can claim the home office deduction and all that is involved in it.
What is a “Home Office”?
Before we get into it, let us first define what a “home office” is. As the gurus over at guttulus.com point out, your home office is not the coffee shop, library, or even a coworking space. A home office is part of your home, although that doesn’t mean that it has to be located inside your house. A home office can be a spare office in your house, your garage, the shed in your backyard, a barn, or any free-standing structure on your property. As long as it meets the IRS definition of “home office”, you can deduct it on your taxes, even if it is the corner of your dining room or the nook under your stairs.
What requirements should your home office meet?
To claim the home office deduction as discussed over at runrex.com, your office space has to meet the following two main requirements:
You use the office regularly and exclusively for your business
The home office is the “principal place” of your business
The requirements are stricter than you might think
While the requirements listed in the previous point seem straightforward, they are a lot stricter than you may realize. When it comes to the “regular and exclusive use” requirement, this includes after hours, which means if you are the only person using the office between regular work hours, then that is great. If, however, the kids come on after, say, 6.00 pm to do their homework, then the office is no longer used “regularly and exclusively for your business” and you may not qualify for the deduction as per the gurus over at guttulus.com.
Partition any shared space
As already mentioned, you can use a corner of your kitchen to work from home, but you can only claim this area as your home office if you can show that you exclusively use that space for only your business. Therefore, you should consider adding a curtain that closes your “office” off from the rest of the kitchen to show that the area is indeed exclusively for your office.
Can you attend meetings at a client’s business?
It is also worth noting that the principal place for business requirement also means that you conduct most of your business at your home to qualify for the deduction. Therefore, it is acceptable for you to go to a client’s business for a meeting or even more than one meeting, as long as a majority of your business is conducted at your home for you to claim the home office deduction.
Who is eligible for the home office deduction?
There was a time when only the self-employed were eligible for the home office deduction as discussed over at runrex.com. However, with the rise of remote work with even in-office employees working at home some days of the week, more workers are eligible for the deduction. If you are a freelancer or self-employed and work primarily at home, then as long as your home office meets the previously discussed IRS requirements, you are free to claim the home office deduction.
What about regular employees?
For regular employees, the gurus over at guttulus.com point out that they will need to meet different rules to claim the home office deduction, whether you are a full-time remote employee or someone who works from home a few days a week. For starters, you must be required by your employer to maintain a home office because of your job. To meet this test, your home office must be:
A condition of your employment
Necessary for your employer’s business to function properly
Necessary for you to perform your duties
Can you choose to work from home, then, and still claim the deduction?
Given the requirement discussed in the previous point, you can’t claim the home office deduction if you work from home because you want to. If your employer provides you a place to work, but you prefer to work at home, then you are NOT eligible for the home office deduction as explained over at runrex.com. An “employer-provided office” can include a coworking space but doesn’t include a coffee shop.
Are homeowners the only people that can claim this deduction?
It is also worth noting that homeowners aren’t the only people who can claim the home office deduction. This is because renters are also eligible to claim the deduction if their home office meets the IRS guidelines.
Methods for calculating how much you can deduct
After determining that your home office is eligible for the deduction, you have to calculate how much you can deduct. There are two methods for doing this, each having its pros and cons. It is also important to note that you don’t have to use the same method to calculate the deduction every year and that you can use one method one year and the other method the following year if you want.
Simplified method
The first method is the simplified method, which, as its name suggests, is quite simple, which is its greatest advantage. Unlike the actual method, here you simply determine how large your home office is (in square feet), and then you multiply that number by $5. The result of your calculation is the number you can deduct from your taxes as covered over at guttulus.com.
What if your deduction is more than your business’s gross income?
From the previous point, if your home office is 300 square feet, you can deduct a total of $1,500 from your taxes (300 x $5). However, as is outlined over at runrex.com, if the amount of your deduction is more than your business’s gross income, you cannot claim the home office deduction, something worth noting.
The main drawback of the simplified method
As the subject matter experts over at guttulus.com point out, the main disadvantage of the simplified method is that you can’t use more than 300 square feet when calculating your deduction. Therefore, if your office is larger than 300 square feet and you use the simplified method to calculate your deduction, you can only deduct a maximum of $1,500.
The actual method
While the actual method is more complicated than the simplified method, it can give you far greater tax savings. Particularly as it is not limited by space as is the case for the simplified method as discussed in the previous point.
The main drawback of the actual method
The main drawback of the actual method is that it requires you to keep meticulous records that separate what you buy for your business and what you buy for your home. This is an issue because separating these expenses isn’t as simple as using a business account to pay for a ream of paper, for example.
Direct, indirect, and unrelated classifications
Additionally, the IRS also requires you to classify your business expenses as direct, indirect, or unrelated as covered over at runrex.com. The IRS defines the different expenses as:
Direct expenses – expenses related solely to your business such as carpeting only the home office for example.
Indirect expenses – expenses for the entire home that also benefit your office such as home insurance, mortgage, etc. for example.
Unrelated expenses – expenses that are needed for the home, but not for the business such as mowing the lawn or painting your bedroom for example.
Proving that something the IRS says is unrelated is a direct or indirect expense
As the gurus over at guttulus.com point out, you should remember that if you claim something the IRS says is unrelated, then you will need to be able to prove it is a direct or indirect expense. Also, you can’t claim the full amount of an indirect expense, only part of it.
Calculating the percentage of your office compared to the rest of your house
You will also have to calculate the percentage of your office compared to the rest of your house, and while the IRS says that “you can use any reasonable method to determine the business percentage”, most filers use one of the following two methods:
Divide the area you use for your business by the total area of your home
When the rooms in your home are approximately all the same size, divide the number of rooms used for your business by the total number of rooms in your home.
For example, in the first method, if your home is 2,000 square feet and your home office is 200 square feet, divide 200 by 2,000. That gives you a home office percentage of 10%.
In the second method, your home has 10 rooms, and you use one of the rooms as your office, divide 1 by 10 and your business percentage is 10%.
Advantages of the actual method
The following are some of the advantages of the actual method:
If you own your home, you can depreciate it. When you depreciate your home, you deduct the “wear and tear” on your home office, and when you go to sell your home, you can recover the depreciated cost.
If you make permanent improvements to the house, in some cases, you can deduct the improvements.
As a homeowner, you can deduct part of your real estate taxes and mortgage interest and you can also deduct things like insurance, a security system, and certain utilities.
Renters can also take advantage of the actual method as you can deduct your home office and some related expenses from your taxes as well.
Is the office the only thing you can deduct?
Finally, the physical office space isn’t the only thing you can deduct as there are other deductions available under the home office deduction. However, you should keep in mind that most of these deductions are only available if you use the actual method, not the simplified one. Also, if you are a regular employee and your employer reimburses you for the expenses, many of these expenses are likely not deductible, and as a regular employee, you may even not be eligible for some of these deductions. These additional deductions include office décor and business expenses and are covered in more detail over at runrex.com.
The above article only just begins to scratch the surface as far as this topic is concerned, with more on this topic to be found over at the highly-rated runrex.com and guttulus.com.
