Jennifer S. Wright, EA | Grand Junction Office
Working from home has its perks. You can skip the commute, wear comfy clothing, keep a more flexible schedule, and you might even save money on your tax return. The home office deduction can save you a bundle, if you meet the tax law qualifications.
The home office deduction is available for homeowners and renters, and applies to all types of homes. There are basically two methods for deducting the portion you use for business: the simplified method and the regular method.
The simplified method grants a flat deduction of $5 per square foot, up to 300 square feet ($1,500), of the home you use as dedicated work space. The regular method requires you to determine the actual expenses associated with the home office. Some of the common expenses that may be included are mortgage interest, insurance, utilities, property taxes and depreciation. The regular method may give you a bigger deduction, but it requires more work, and the difference may not be worth it. Taxpayers can choose between the simplified method and the regular method on a year-to-year basis.
Are you eligible?
To qualify for the home office deduction, part of your home must be used “regularly and exclusively” as your principal place of business. This is defined as follows:
- Regular use. You use a specific area of your home for business on a regular basis. Incidental or occasional business use isn’t considered regular use.
- Exclusive use. You use a specific area of your home only for business. It’s not required that the space be 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. The IRS grants a couple of very narrow exceptions to the exclusive rule: using part of your home to store sales samples or to provide licensed day care services. In both cases, there are special rules and calculations required to claim the deduction.
Your home office will qualify as your principal place of business if you 1) use the space exclusively and regularly for administrative or management activities of your business, and 2) don’t have another fixed location where you conduct substantial administrative or management activities.
Examples of activities that meet this requirement include:
- Billing customers, clients or patients,
- Keeping books and records,
- Ordering supplies,
- Setting up appointments, and
- Forwarding orders or writing reports.
Other ways to qualify
If your home isn’t your principal place of business, you may still be able to deduct home office expenses if you physically meet with patients, clients or customers on the premises. The use of your home must be substantial and integral to the business conducted.
Alternatively, you may be able to claim the home office deduction if you have a storage area in your home — or in a separate free-standing structure (such as a studio, workshop, garage or barn) — that’s used exclusively and regularly for your business.
OK for employees?
Employee expenses for business use of the home are not allowed. The Tax Cuts & Jobs Act (TCJA) tax reform bill suspended this deduction for employees with its suspension of all miscellaneous itemized deductions subject to the 2% of adjusted gross income limitation.
The home office deduction can provide a valuable tax-savings opportunity for business owners and other self-employed taxpayers who work from home. Be sure to pay close attention to the rules to ensure that you’re eligible and make sure that your recordkeeping is complete. Keep in mind that, when you sell your house, there can be tax implications if you’ve claimed a home office deduction.
Finally, always talk with your tax advisor if you have questions. They can help you ensure you are eligible for the deduction, maintaining proper records, and you are reaping the most tax benefits from the business use of your home.
Jennifer S. Wright, EA
Jennifer Wright is a tax supervisor and enrolled agent with Dalby Wendland’s Grand Junction office. She specializes in tax return preparation and planning services for individuals, businesses, and estates and trusts. Jennifer has experience in several industries, including farm and ranch, oil and gas, and restaurants. She graduated from Colorado Mesa University with a bachelor of science in accounting and is a member of the Colorado Society of CPAs.
