Tax reform eliminated the itemized deduction for employee business expenses. Thus, employees cannot deduct home office expenses for the tax years 2018 through 2025. However it’s worth noting that the rules did not change for self-employed persons. So if you are self-employed, a small business owner, or an entrepreneur, you can continue to deduct qualifying home office expenses. You might also qualify if in addition to your regular day job as an employee, you own your own consulting business on the side, or have a side gig selling oils, clothing, jewelry, etc., at night or on the weekend. Either way, the home office deduction just might help you keep more profit in your pocket if you qualify.
To qualify for the home office deduction, the part of your home attributable to the business must be “exclusively and regularly” used for your business. That part of your home must be your principal place of business where you meet or deal with clients or customers, or more precisely, your home office must be your actual office and not just at your home for convenience. Your home office doesn’t have to be the only place you meet your clients or customers, but it must be your principal place of business which means you use that space exclusively and regularly for administrative or management activities, billing customers, setting up appointments, keeping books and records, etc. Using a spare bedroom as both your office and a playroom for your kids makes it ineligible, and simply doing some work at the dining room table isn’t enough to qualify.
You can claim the deduction whether you own your home or rent a home, apartment, or a condo. Even a free-standing space such as a studio, garage or a barn counts as long as the structure meets the “exclusive and regular use” requirements. There is an exception to the rule if you use the office for storage of inventory or product samples you sell in your business. Determining the value of your home office deduction is easier than you think! In 2013 the IRS introduced a simplified option that requires less record-keeping than the “regular” method because you aren’t deducting actual expenses. Instead, the square footage of your space is multiplied by a prescribed rate of $5 per square foot for up to 300 square feet of space. So if your home office is 300 square feet or less, the IRS gives you a deduction of $5 per square foot of your home that is used for the business, up to a maximum of $1,500. Note: the deduction cannot exceed the gross income from the business use of home less the business expenses.
The more difficult “regular” method values your home office by measuring actual expenditures against your overall residence expenses. You can deduct mortgage interest, taxes, maintenance and repairs, insurance, utilities and other expenses. The choice whether to use the simplified deduction or to deduct actual expenses depends on which would net you the bigger tax deduction. The general rule is use the simplified method for single-room offices and small operations, but use the actual-expenses method if the business makes up a large part of the home.
CONTACT US: Don’t let the fear of an audit keep you from taking the home office deduction. The simple method is somewhat of a “Safe Harbor.” If you’re a homeowner and you are thinking about taking the home office deduction using the actual-expenses method, there are other things to consider such as depreciation, capital gains tax when selling the home and extensive record keeping. Let our tax experts guide you as to which method is actually best for your situation, as many other rules and exceptions apply. Call toll free 855-534-2727.
