Working from home has its perks. Not only can you skip the commute, but you also may be eligible to deduct home office expenses on your tax return. Deductions for these expenses can save you a bundle if you meet the tax law qualifications.
Curious to learn more about work from home tax deductions, and whether you should choose the simplified or actual method? Read more below.
Work from Home Tax Deductions: Recent Changes
As of 2018, remote employees could claim a home office deduction. However, the Tax Cuts and Jobs Act prohibited remote employees from taking such a deduction.
So, work from home employees can no longer claim the home office deduction. However, business owners or the self-employed who use part of their home for business purposes can still take advantage of the deduction.
Do you believe you fit into one of the two latter categories? Reach out to your financial advisor before you deduct these expenses.
Do I Qualify for the Home Office Deduction?
To qualify for a home office expense deduction, part of your home must be used regularly and exclusively as your principal place of business. This is defined as follows:
You use a specific area of your home for business on a regular basis. Incidental or occasional business use isn’t considered regular use.
You use a specific area of your home only for business. It’s not required that the space is physically partitioned off. But you don’t meet the requirements if the area is used for both business and personal purposes, such as a home office that you also use as a guest bedroom.
Your home office will qualify as a principal place of business if you:
- Use the space regularly and exclusively for administrative or management activities of your business; and
- Don’t have another fixed location where you conduct substantial administrative or management activities.
Examples of activities (found in point 2) that meet this requirement include:
- Billing customers, clients, or patients
- Keeping books and records
- Ordering supplies
- Setting up appointments
- Forwarding orders or writing reports
Home Office Deduction: Other Ways to Qualify
Do the previous requirements apply neither to you nor your business? Don’t worry. You may be able to write off some expenses in other ways. Here are a few examples of how you can qualify.
Say your home isn’t your principal place of business, but you physically meet with patients, clients, or customers on the premises. In this instance, you may still be able to write off home office expenses. The use of your home must be substantial and integral to the business conducted.
Alternatively, you may have a storage area in your home or in a separate free-standing structure, such as a studio, workshop, garage, or barn. If you use these areas regularly and exclusively for your business, then you may be able to claim the home office deduction.
Deducting Office Expenses: The Actual Method
Traditionally, taxpayers have deducted actual expenses when they claim a home office deduction. Deductible home office expenses may include:
- Direct expenses, such as the cost of painting and carpeting a room used exclusively for business
- A proportionate share of indirect expenses, such as mortgage interest, property taxes, utilities, repairs, and insurance, and
- A depreciation allowance
Keeping track of actual expenses is time-consuming, however.
Deducting Office Expenses: The Simplified Method
There’s a simplified method that’s been available since 2013: You can deduct $5 for each square foot of home office space, up to a maximum total of $1,500.
For example, if you’ve converted a 300-square-foot bedroom to an office you use exclusively and regularly for business, you can write off $1,500 under the simplified method (300 square feet x $5). However, if your business is located in a 600-square-foot finished basement, the deduction will still be only $1,500 because of the cap on the deduction under this method.
As you can see, the cap can make the simplified method less beneficial for larger home office spaces. But even for spaces of 300 square feet or less, taxpayers may qualify for a bigger deduction using the actual expense method.
So, tracking your actual expenses may be worth the extra hassle.
Am I An Audit Target?
Be aware that claiming expenses on your tax return for a home office has long been a red flag for an IRS audit since many people don’t qualify. But don’t be afraid to take a home office deduction if you’re entitled to it. You just need to pay close attention to the rules to ensure that you’re eligible—and make sure that your recordkeeping is complete.
The home office deduction can provide a valuable tax-saving opportunity for business owners and other self-employed taxpayers who work from home. Keep in mind that, when you sell your house, there can be tax implications if you’ve claimed a home office.
Contact Pasquesi Sheppard for Home Office Deduction Help!
Unsure whether to choose the simplified or actual method? Not sure how to proceed in your situation? Contact us. Serving taxpayers in Chicago and Lake Bluff, Pasquesi Sheppard is happy to help you.