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A Guide to Home Office Tax Deductions

I have watched many an episode of House Hunters on HGTV where the individuals looking for a new home want a space for a home office. Oftentimes they also express desires that seem a little less reasonable such as having acres of land while living in a big city, but that’s not the topic for today. We are talking about home office tax deductions.

Growing up, my father had an office in our home, and now, in my home, we have an office space. Whether it’s because you are self-employed, work remotely, or just want to have a space in your home for paying bills the home office space is an important feature in many people’s homes.

You may have heard of home office tax deductions before, or you may not have. You might be a little wary, unsure if your workspace qualifies, or have absolutely no idea where to begin. Read on to learn about if your home office qualifies for a deduction on your 2018 tax return, and how to file for it.

A Quick Overview of Home Office Tax Deductions

Individuals who are self-employed can deduct home office expenses on their 2018 tax returns. In years past, employees who worked remotely on occasion were also able to deduct home office expenses on Schedule A, but that is not the case this year. Due to 2017’s Tax Cuts and Jobs Act, unreimbursed job expenses for w2 employees, including home office expenses, are no longer able to be deducted.

I work for myself…What kind of home office do I need to qualify for a tax deduction?

Self-employed individuals looking to take advantage of these tax deductions may wonder what exactly constitutes as a home office. Here is the official IRS ruling, the home office must be used “Exclusively and regularly as your principal place of business.” This means that if you pull your laptop into your bed each morning and work from there, you cannot consider that a home office space to qualify for a deduction. The same goes for working from the living room couch or the kitchen table. In those situations your work zones are not being exclusively used for business purposes.

That said, you don’t need a fancy home office in order to qualify. In fact, it doesn’t even need to be partitioned off from the rest of the home. It just needs to be an identifiable space that is used on a regular basis for business purposes, and it cannot be used for any other reason. In-home day care facilities and business storage are two exceptions to this rule.

Take a look at the IRS Publication 587: Business Use of Your Home to learn more about qualifying for these home office tax deductions.

Home office tax deductions:  You don't need a fancy office in order to qualify for a deduction.

My home office qualifies…Now what?

They are two ways to figure out your deduction: using the actual expenses, or the simplified method. If you decide to go the actual expenses route you will need to categorize expenses into three separate categories: direct, indirect, or unrelated. Direct expenses pertain only to the business and the home office. Indirect expenses are expenses such as electricity or heat that pertain to the home as a whole and include the home office. Whereas, unrelated expenses do not pertain to the home office at all. Think buying a new lawn mower or installing a new sprinkler system. These categories will determine whether an expense is fully deductible, partially deductible, or not deductible at all.

Please read IRS Publication 587 for more in-depth details about using actual expenses as well as form and filing instructions.

That can get pretty tricky. So, the simplified method is just that…much simpler. Essentially you can have a deduction of $5 per sq. foot of the home office space, up to 300 sq. feet. If the home is used for rental use, you cannot use the simplified method.

I’ve heard that home office deductions lead to IRS audits, is that true?

Not necessarily. But, don’t be dumb about it. As tax expert Robert Wood states in an article for Forbes, “If you don’t have a solid home office claim with good records, don’t claim it. If your money-losing sole proprietorship is really just a hobby, treat it as such.” If you are on the fence about claiming something, most likely it should not be claimed.

Certain home-based businesses, such as day-cares are a different ball game. If you run an in-home day-care, make sure to learn all of the requirements of that particular situation.

Please make sure to familiarize with all of the IRS rules surrounding this and/or consult with a quality CPA prior to filing your tax return.  Remember, this is only a basic overview and your specific situation may look different.

Looking for more advice on tax deductions this year? Or, need help with your business tax return? Contact us at Lumen Advisory and Finance!