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If you have your own business and use your home to run that business, then you may be able to deduct expenses for the business as part of the regular usage of your home. The home office tax deduction is allowed for both renters and homeowners. There is no restriction to the type of home that this could be.
Who Qualifies for the Home Office Tax Deduction?
There has been an increasing number of people at home instead of an office with the pandemic causing many office workers to work from home, the rise of remote work, and people starting their own side hustles. You may be able to take a tax break for your home office expenses, but you need to follow some strict rules.
There is a lot of confusion around the home office deduction because many remote workers who took the break in the past are no longer eligible. Unfortunately, the Tax Cuts and Jobs Act removed the home office deduction for employees who work from home for an employer. Here are some general guidelines outlining whether you qualify based on your employment status:
You qualify for the deduction no matter if you are a home owner or a renter. Additionally, you can use the deduction for any type of home wherein you reside: a house, a condo, apartment, or even a tiny home! However, the one sticking point is you cannot use it for temporary housing such as a hotel or Airbnb rental.
Building on the graphic shown above, here are a few of the requirements you will need to meet in order to qualify for the home office tax deduction:
Regular and Exclusive Use
The space you’re using for business must be used exclusively for conducting business. Your office doesn’t need to be in a separate room, but it needs to be an area of your home used exclusively for home office activities.
For example, using a corner of your home gym as your office or the spare bedroom infrequently used by in-laws actually makes these spaces ineligible. Another example of where it cannot be is your dining room table where your family eats dinner every night.
Principal Place of Your Business
In order for your home office to qualify, it must be your principal place of business or a space where you regularly meet with clients or patients. In layman’s terms this means that your home office space is exclusively and frequently used for clients/ patients and management activities, which include billing customers, recording accounting, and other recordkeeping activities.
For example, if you are a kitchen appliance repairman and you do appliance repairs at other people’s homes but your administrative work is always done in your home office, then you would qualify for the home office deduction.
There are two exceptions to the regular and exclusive use rule. The first is if your office space is used to store inventory and product samples for your business. The second is if your home is used for day care services for children, handicapped, or elderly folks.
What if You Are Working at Home for Just a Few Months?
If you are worked at home for just a few months (I am looking at you, coronavirus), then you may be able to take a partial-year home office deduction. However, the rules are still the same: you must be self-employed and the home office must be used regularly and exclusively for business during those months.
While you can’t claim a deduction for the home office as an employee, sometimes you can sweet talk your employer to reimburse you for some of your “home office” expenses, such as desks, chair, computer monitors, or keyboards.
Keep this requirement in mind if you’re setting up a temporary office in your home. As we discussed above, it could be a separate room, but you do need to make sure it is used exclusively for business types of activities.
What is the Home Office Tax Deduction?
Home office taxpayers may select to use either the regular option or the simplified option for any given tax year. How you claim the deduction from your home office tax depends on the method you use to calculate the tax. You have the option to choose that method when you file your taxes.
This table provides a helpful little guide to help you choose which option makes the most sense for you:
The Regular Option
The regular option for taking the home office tax deduction generally entails calculating the percentage of your home used for your business. This requires you to calculate how large the space is in relation to the rest of your home to get a percentage basis.
Be sure to be accurate about the amount of space that is actually used for your home business. Unusually high percentages may give the IRS a reason to audit your tax return.
Calculating the Home Office Business Deduction (Regular Option)
The regular option entails a calculation of the square footage of your home office and calculating the percentage of square feet in your entire home. For example, if your home office is 195 square feet and your total home is 1,000 square feet, then the percentage towards your home office is 19.5%.
A slightly more simple method is allowed within the regular option when all of the home’s rooms are similar in size. With this method, you can divide the number of rooms used for the business by the total number of rooms in your home. For example, if you have 1 room for your business and 5 total rooms in your home, then the percentage that goes towards your home office is 20%.
Here are some examples of the types of expenses you can deduct for your home office:
Direct expenses – repair & maintenance of the business space (e.g. painting the walls in the room).
Indirect expenses – Using the 20% example from above; 20% of bills & utilities, homeowners insurance, HOA fees, home security systems, and then general home repairs & maintenance.
Interest and property taxes – Similar to indirect expenses listed above, you convert percentage of those expenses from personal itemized deductions to business write-offs.
Rent – If you are a renter, then you can deduct your home office percentage from the total rent paid.
Home depreciation – The percentage of the home office can also be used to depreciate that amount of your home.
The Simplified Option
Some people have found the standard option can be intimidating given the amount of recordkeeping required for calculating, allocating, and affirming the size and expense quantity. Because of this, the IRS began offering a simplified option for claiming the home office tax deduction starting in 2013.
For the 2020 tax year, the simplified option includes a standard deduction of $5 per square foot of home used for the business. Note that this standard deduction is limited to a maximum of 300 square feet. Unfortunately, if you are a homeowner you may not deduct home depreciation if you are taking the simplified option.
Calculating the Home Office Business Deduction (Simplified Option)
As mentioned above, for 2020, the predetermined rate is $5 per square foot with a maximum of 300 square feet. Just a friendly reminder that this space must still be dedicated to business activities only.
For example, if your home office measures 195 square feet, then the deduction would be $975 (195 square feet x $5).
How to Take the Home Office Tax Deduction
If you use the simplified method, you take the deduction directly on Schedule C reporting your business income and expenses. If you choose the standard method, you must submit Form 8829 with your income tax return and then report the total deduction from your business income on Schedule C.
We are not tax professionals, but if you are looking for a way to get your taxes taken care of online, we highly recommend looking into either H&R Block or TurboTax for online or hybrid tax professional services.
Competition is intense within the cohort of tax-prep software providers and TurboTax sits right at the top of the list. However, H&R Block will typically run you a smaller bill than TurboTax. Both companies have extremely professional and modern websites that enable you to use photo and other import options for all of your tax related documents.
H&R Block’s free version of the tax software could in effort equate to large savings for many of its filers. Generally, H&R Block’s products come in at a lower product cost than the TurboTax equivalent products.
One feature that is particularly exciting is H&R Block’s Online Assist feature, which provides on-demand discussions with a certified public accountant (CPA), enrolled agent, or other tax expert at any point in the process.
H&R Block is generally the less expensive of these two tax options
Access to tax professionals on demand but comes at an additional cost
11,000 brick and mortar offices around the world if you want to talk to someone in person
TurboTax, an Intuit company, has products that are very user focused. TurboTax’s interface is similar to having a friendly yet deliberate interview with a chat with a tax preparer. You can go backward and forward through the process is desired, and an icon at the top of the screen provides a status of where you are in the process with a running total of your current refund amount.
Works for more scenarios and comes with all the bells and whistles
Software application is extremely user focused with the interview style experience
Tax advice is available 365 days a year with TurboTax Live
Bottom Line Payoff
The rules on home office tax deductions can be hard to digest. We recommend either consulting with a professional tax advisor or using the appropriate online tax software if you are unsure about how to proceed. However, it is definitely worth looking into if you think you qualify!