There are a lot of myths and fears regarding a home office and your tax deductions. It seems like a one-way ticket to receiving an audit. However, when correctly handled, deducting your home office from your taxes can be a huge money saver.
It’s actually easier than you may think. Today, we want to show you how to figure out if your home office is tax deductible, and what to do if it is.
What counts as a Home Office?
The number one question is whether you have a space that you can actually call a home office. First, let’s dispel the idea that only an office counts. Your “home office” can be a workshop, a studio, or any other space that is easily recognized as your storage or production center for your business. If you conduct any sort of business from a certain space in your home, it can be considered a home office.
Now that this is better defined, your home office is considered tax deductible if any, or all, of these are true:
It’s your “principal place of business”.
- This means that you conduct business from this space, and this space only. For instance, if you own an IT business and have dedicated a room – or part of a room (more on this later) – to your business only, then it can be considered a home office.
You set this room or space aside in your home as a meeting space for clients or prospective clients in the normal course of your business.
- Even if this is not your sole place of business, if you regularly use a part of your home as a conference space for your company, you can count this as your home office. A good example would be a realtor who has a desk at a broker’s office, but who does the majority of their client meetings and paperwork from home.
You conduct business in a separate structure that is on your property but not attached to your main home.
- If you are a woodworker who makes and sells your structures from a garage or workshop built away from your home, this is seen as a home office.
Basically, if you have a specific room in your home or on your property that is used exclusively for business, and you do not otherwise have a fixed location for your business, then the space is considered a home office by the standards of the IRS. But what if you share your home office with your spouse, making your “office” more of a space than an entire room?
You Can Deduct Part of a Room as a Home Office
While there are requirements for this, you can absolutely count part of a room as a home office.
Here’s a good example of how this can apply in a real life situation:
Marjorie is an artist who creates her pieces at home and sells them online and at craft fairs. She shares her workspace with her husband, who has his treadmill set up in the room for his personal fitness regimen. He does not participate in the business, so Marjorie is careful to keep half of the room designated as her business space.
In the case of using part of a room as a home office, the claim must come with proof that is usually not required. For instance, the space has to be regularly and exclusively used for business, with 10 – 12 weekly hours spent in this space performing said business. Proving the deduction is simple – keep a log of your hours and take photographs to prove your use. Once your space has been qualified as a home office, you may start deducting expenses.
How Do I Deduct Home Office Space for My Business Taxes?
To figure out your deduction for a partial home office, first you’ll calculate your “business use percentage”. This is usually the amount of square footage you take up versus the rest of your house. So, if your home is 3000 square feet and you use up 300 square feet, your business use percentage is 10%. Next, you’ll take that percentage out of your rent or mortgage interest and property taxes. So, using that 10% above, if you’re paying $10,000 in rent per year, the number you’d come up with is $1,000. Then, you’ll also need to depreciate the business use percentage of your home’s basis (excluding land) over 39 years as nonresidential property.
Your last step is to deduct your business use percentage of other home-related expenses – such as utilities, repairs, insurance, garbage pick-up, security, etc.
A home office deduction can make a big difference in your taxes at the end of the year. Basically, anything that affects your home due to your business can count as part of that deduction. If you have not yet deducted your home office on your taxes, you’ll want to start quickly – it’ll be surprising to see just how much you can save!
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