Ah, that pesky home-office deduction. For those who work from home, it can be a valuable tax break, but it’s also a tricky one—especially if you own your home. Want to check it out? First, let’s see if you’re eligible.
You qualify for the deduction if your work-space meets the criteria for business use, meaning you use it exclusively and regularly as a principal place of business, or to consult with patients, clients or customers in the course of your work.
You don’t have to be self-employed to claim the deduction, by the way. But your working at home must be required by your employer (i.e. they don’t have office space for you elsewhere) for you to meet the standard.
Murky? The key words here are “exclusive,” “regularly,” and “must”. If you also put the space to some personal use, use it only occasionally, or have a nice desk sitting, unused, at your employer’s office, the IRS won’t allow the deduction.
Pass that litmus test? (Phew.) Then let’s get started.
First, calculate the percentage of your home used for business. For example: If you have a 100-square-foot work-space in a 1,000-square-foot home, 10% is the portion to use.
If you own your home, you would deduct 10% of the mortgage interest you pay (not principal).
So (using hypothetical numbers) you would claim $1,000 of, say, $10,000 in yearly mortgage interest on your Schedule C. Then, on Schedule A you’d only claim the remaining $9,000 for the mortgage interest deduction (no double dipping!).
If you rent, it’s a little simpler. Again calculate the percentage of your home used for business. If it’s 10%, you’d deduct 10% of your rent.
Then there’s the issue of deducting expenses for the maintenance of your home office space. If you own, you can deduct a portion of property taxes, insurance, utilities, repairs/maintenance, and other expenses associated with your office.
Deductions can be direct (related solely to your office, like painting the walls of just that area) or indirect (related to your entire home, like homeowners insurance).
Direct expenses are totally deductible. For indirect ones, you’ll need to calculate the percentage you’re allowed to deduct using the percentage of your home used as office space. So, for example, if your office space occupies 10% of your home, you’ll be able to deduct 10% off of all your indirect expenses.
Renters are entitled to deduct many of the same expenses relating to running a home office as homeowners. The difference lies when it comes to expenses related directly to home ownership. A homeowner, for instance, could write off a percentage of their mortgage interest, property taxes, and homeowner’s insurance. A renter with a home office isn’t entitled to those options, but can, in addition to a percentage of their rent, write off a percentage of their renter’s insurance.
Should you depreciate? Depreciating is where things get complicated. If you own your home, you can depreciate your office space in addition to claiming the mortgage interest. That means deducting a portion of the value of the office, over many years.
You don’t have to depreciate your home office, however. It could further reduce your business income,. And the total amount of depreciation you’ve claimed over time could be counted as a taxable gain if you sell your home, so consult a tax pro before deciding which way to go on this.
If you’re a child care provider, there are special rules for in home daycare facilities that you’ll want to check out. Food, supplies, mileage—some or all of many expenses may be deductible, but do your homework (this IRS overview is really helpful).
Finally, if you’re looking at a potentially sticky situation (depreci-what?), definitely consult a CPA who can help walk you through it.