Home Office Deductions
Home Office Deduction:
Today we are going to talk about the home office deduction. This is completed on Form 8829, Expenses for your Business Use of Your Home, which is filed along with your Schedule C – Profit or Loss from your Business
Before we begin, let’s discuss who is eligible to claim the home office deduction.
Here are the main criteria:
+You must be self-employed. After the TCJA, employees who work from home are not eligible to claim the home office deduction as a miscellaneous itemized deduction on Schedule A. In short, you must be self-employed
+The part of your home eligible for the home office deduction must be “exclusively and regularly for your principal place of business” and “exclusively and regularly as a place where you meet or deal with your clients.”
This is the biggest issue I’ve seen with our clients. The area of your home that you use as your home office must BE EXCLUSIVE to your business. So, if you have a den that you work in, but also use the den for personal/recreational reasons, then the den cannot be used as a home office. Again, this area must be 100% exclusively used for your business. The space does not need to be marked off by a permanent partition, but it must be an area that is exclusively used for business. The only exception is if you’re holding inventory or product samples or run a daycare facility. If that’s your case, contact me as it’s a little more complicated.
Now that we have the main criteria established, let’s discuss the two methods to quantify this amount.
+Simplified method – Super straight forward.
You take the square footage of the designated area, multiply it by $5 a square foot, and get your home office deduction.
For example, if your home office is 200 square feet, the simplified option for the home office deduction would allow you to claim $1,000 (200 sqft x $5)
+Pro-rate method (Actual expenses): This is the square footage of your home office in relation to your home size. Assuming a 2,000 sqft home and a 200sq ft home office, that means your home office represents 10% of the size of the home. Therefore, you can take 10% of home-related expenses for your home office deduction. Examples may include rent, depreciation home insurance, general repairs that benefit the entire home, security system, mortgage interest, taxes, and utilities. If a repair is done in the specific area designated for the home office (such as a broken window in the home office area), that amount is fully deductible.
+So long as your business income exceeds all of your business expenses, you can claim the full amount of the home office deduction. If your business expenses exceed income, your deduction will be limited and we can discuss further.
+Most questions arise from the pro-rate/actual method.
If you’re looking to claim the home office deduction for the first time, or want to talk about this deduction for your 2019 return, give me a call or email.