Let’s talk about the home office deduction.
People ask me about it all the time.
“Can I take it?”
“Do I qualify?”
“Will it increase my chances of getting audited?”
All of these are reasonable questions—particularly nowadays, when the numbers of micro-businesses, home-based entrepreneurs, remote workers, work-from-home employees and freelancers have grown so much over the past few years.
Here’s the answer, in a nutshell: The home office deduction is perfectly legitimate and you should absolutely consider it. Here are some important facts about this deduction—all sourced from the IRS’ summary, Publication 587 (Business Use of Your Home) and Form 8829 (Expenses for Business Use of Your Home). Of course, you should also check with your accountant.
Number 1: To even consider getting the deduction, a part of your home has to be your principal place of business.
Your bedroom doesn’t count and neither does your kitchen. It must be an area that is exclusively and regularly used for business—seeing customers/clients or storing stuff. Your work-from-home employees may qualify too, particularly if they’re working from home at your behest. There are different rules for rental properties. Publication 587 goes into more detail and provides specific case studies which may match your situation. If for example, you’re operating a day care facility from your home, Form 587 has specific instructions for you too. Sorry, Xanax is not deductible.
Number 2: You must be filing either a Schedule C or a Schedule A with your personal tax return.
Schedule C is the form for an unincorporated business or proprietorship. This is the form where you list all revenues and expenses related to your business, including the home office deduction. Schedule A is the itemized deduction form and will include other items such as medical expenses, taxes paid and charitable contributions. You will only use Schedule A if your itemized deductions exceed the standard deduction on your personal return ($6,300 for single filers, $12,600 for married filing jointly).
Number 3: You can be complicated.
If you desire, you can submit a full detail of expenses related to your home office on Form 8829. You can calculate depreciation. You can list out your costs for insurance, repairs, telephone and internet services, rentals?, taxes, interest—as long as they’re all related to your business activities in your home. Some of these expenses are directly related, others you’ll need to allocate based on the percentage of space your office takes up in your home. Your deduction is limited based on the income your home office is generating.
Number 4: Or you can be simple.
In 2013, the IRS recognized that many people are operating businesses from their home and don’t want to be bothered with the complexities of the detailed calculations above. So the agency is now allowing you to simplify the process. You can just take the square footage of the business use of your home and multiply it by a standard $5. The square footage is limited to 300 feet. Again, Form 587 offers examples.
Number 5: Having a home office doesn’t increase your chances of an audit.
The IRS doesn’t disclose how it determines who they pick for an audit. But relax. For starters, a small, small, small percentage of people and small businesses are picked by the IRS for an audit every year. Most of their efforts go towards following the big money from big companies or high-wealth individuals. That’s not to say that you won’t win (or lose) the audit lottery and be chosen. But it won’t be because of your home office, unless you’re claiming something so outrageous and so large that it causes the IRS computers to spit out their floppy disks and stop their reel-to-reel tape drives. Having said that, you still want to play by the rules because if you are unlucky enough to be chosen—even for a cursory review-you want to make sure your numbers add up.
The home office deduction may be a thing for you. Talk to your accountant. Don’t ignore this potential tax-saver.
Join writer and small business owner Gene Marks each Wednesday on the Small Biz Ahead podcast. You can submit a question for Gene to answer on the podcast.