The Home Office Tax Deduction: One of the Most Misunderstood (and Dangerous) Tax Breaks
| Feb 24, 2017
According to the latest figures from the Bureau of Labor Statistics, 24% of employed people now do some or all of their work at home. Beyond the obvious benefits of unfettered access to your refrigerator and a dress code of stretchy elastic-waist pants, working at home can save you more than lunch money on National Tax Day, thanks to the home office deduction.
Simply put, the home office deduction allows you to write off part of your home expenses on your business tax return by separating out the costs associated with using your home for personal purposes (making pancakes) and business (answering work email). Yet of all the tax write-offs available, this one is among the most murky and misunderstood.
Allow us to clear the air for you happy home workers so you can claim your home office tax deduction with confidence.
Who can claim the home office deduction?
To claim the deduction, you must meet two requirements. First, an area of home has to be designated as your principal place of business, and—the clincher—used exclusively for work. Got that?
“This means your couch, exercise room, and kitchen table don’t count,” says Aaron Lesher, a CPA at Hurdlr, a finance management app. Ignore these rules and your chance of being audited can skyrocket.
To be clear, that room you work in that doubles as a guest room when mom comes to town won’t pass muster, even if you spend 40 hours a week there, says Abby Eisenkraft, financial expert and author of “101 Ways to Stay Off the IRS Radar.” So if you really want to do things right, kick mom out of your office and have her sleep on the couch!
While this separation of work and personal use is probably easier if your office is its own separate room, it doesn’t have to be. If, say, your desk is parked in a corner of your bedroom or part an open floor plan, simply measure the space you use for your office, whether or not there are walls.
The key is the area must be used only by you, just for work—not to peck out personal email or pay bills. To make that delineation easier, you can even put up a physical barrier like a partition or shelves.
What if I’m an employee for another company?
Employees of larger companies can also claim the home office deduction. But there’s an additional requirement that the home office must be for the convenience of the employer—for example, if the employer doesn’t have a local office.
“The IRS will look at this closely and request proof, such as a letter from the company,” says Eisenkraft. If you simply prefer to work at home, you can’t take the home office deduction.
“That’s considered for your convenience,” explains Eisenkraft, “not the employer’s.”
How to claim a home office deduction
The IRS offers two ways to calculate this separation—one simple, the other a bit more involved, says Jeff Morris, accounting partner at Nathaniel Jacobson, serving Maryland and Washington, DC.
The simple method: Since 2013, you can claim your deduction by figuring out the square footage of the space in your home that you use for business purposes. Each square foot you use for work is worth $5, and you can claim up to 300 square feet for a maximum claim of $1,500. This new method vastly reduces the paperwork required for taking the deduction, says Morris.
The complicated method: This method works best if the expense of your home business exceeds the simple $1,500 deduction. Calculating this involves tracking all the costs of your home (think maintenance, insurance, repairs, utilities, real estate taxes, etc.) and depreciation (normal wear and tear).
Next, separate and allocate those expenses based on the percentage of the home you use solely for business purposes. So if your office space breaks down to 10% of your home’s total square footage, you can deduct 10% of your home costs—which could add up to a sizable chunk of change. The key to using this deduction is keeping careful records.
Isn’t the home office deduction a red flag for an audit?
In a word: nope. In fact, the IRS created the simplified, square-foot-of-office-space method to take the audit fear out of the home office deduction.
“This might surprise some people, given the fear of an audit that the home office deduction used to strike in the hearts of many taxpayers,” says Morris. But in the age of telecommuting and online behemoths like eBay that started from a home office, the reality is that the deduction is becoming increasingly common, and it doesn’t make a taxpayer any more susceptible to an audit than any other deduction a small-business owner may take.
Still, if you want to make sure you don’t end up in the auditing line, there are things you can do. First off, remember this: “It’s not the home office deduction that flags a return for an audit, but the magnitude of specific claimed expenses that get taxpayers in trouble,” says Morris.
What would a red flag look like? Claiming 2,950 feet out of a 3,000-square-foot home for business use. “Or trying to write off that $25,000 pool renovation.”
In other words, as long as you’re legitimately working at home and aren’t unashamedly trying to con the system, you should be able to claim your home office deduction fair and square.