Home Office Deduction Guidelines
Over the last year, we have seen an unprecedented number of people working primarily from home. In certain situations, there is a home office deduction available that can reduce taxable income. Here are some guidelines used to determine if the deduction is appropriate.
To be eligible for the home office deduction, the taxpayer must be self-employed and not have another office available for daily use. Under previous tax rules, W-2 employees were permitted to take a miscellaneous itemized deduction for home office expenses but this was omitted with the 2017 tax law update. Any self-employment income (also known as 1099 income), whether full-time or work on the side would qualify; also, certain partners in partnerships are considered to be self-employed and the management of rental properties would also qualify.
There are two basic requirements for the taxpayer’s home to qualify as a deduction:
- There must be exclusive use of a portion of the home for conducting business on a regular basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room as long as it is used both regularly and exclusively in the business.
- The home must be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home, but also uses their home to conduct business may still qualify for a home office deduction.
There are two options for calculating the deduction, the regular and the simplified method. The majority of our clients benefit from using the simplified method. This is a $5 per square foot rate based on the size of the home office. It is capped at 300 square feet, for a maximum $1,500 deduction. In certain circumstances, the regular method is advantageous but requires recordkeeping throughout the year of all operating expenses of the home including utilities, maintenance, insurance, real estate taxes, etc. as well as providing the total square footage of the office space used and the total square footage of the home.
Please reach out If you believe that you fit the criteria for a home office deduction, and we will make sure that it is taken advantage of it if it is appropriate for your tax return.