The Dream Office? Your Living Room

6/1/2017 | Written by: Kyle Hopkins

Who doesn’t dream of waking up in the morning and not having to commute? Working from home is a choice more Americans are making all the time. Both self-employed and remote workers can take advantage of this often overlooked deduction. If claimed incorrectly, however, the home office can be an audit trigger. Before trying to calculate your tax savings, there are a few questions to ask about your home office to see if it qualifies: 

  1. Is your home office used exclusively for business? (i.e., Is it a dedicated space for work and not used for personal activities?) 
  2. Is your home office used to meet with clients, customers, or patients in the normal course of your business? 
  3. Do you regularly conduct business from your home office? 
  4. For those who are employed by a company: Is the home office for the convenience of your employer? 

Those questions are just the basics, but, if you answered “no” to any one of them, your home office may not qualify for the deduction. If you answered “yes” to the above questions, your home office may qualify. Now, you just need to know how to calculate your tax deduction. 

When determining the deduction for a home office, there are two different methods to choose from: Actual expenses and the simplified method. First, we’ll discuss the simplified method. For this method, you simply need to know the square footage of the home office. Most tax programs will automatically calculate the deduction by multiplying the square footage of the office by a standard amount. The size of the home office is capped at 300 square feet when using this method. 

The second method to determine a home office deduction is using the actual expenses. This method allows for a higher deduction but also requires more diligent record keeping.  If you plan to claim actual expenses, these are a few expenses you will need to maintain records for: 

  1. Rent/Mortgage payments 
  2. Utilities 
  3. Any repairs 
  4. Real estate taxes (if you own your home) 

Using this method, you will need to separate the expenses into two categories:  

  1. Direct expenses – Expenses that apply only to the home office (i.e., If new flooring was installed in the home office) 
  2. Indirect expenses – Expenses that apply to the entire home 

The next step also requires that you not only measure the square footage of your home office, but also the square footage of your entire home. The indirect expenses are only taken as a percentage that applies to the home office. For example, if you paid $1,000 in electric bills through the year and your home office is 10% of your home, you would be able to deduct $100 as it relates to the home office. Additionally, homeowners who claim the actual expenses will be able to claim depreciation on the portion of their home that relates to the home office. 

It is important to keep in mind that once a method is chosen for the home office, that method cannot be changed if the return is amended. In addition remember that you should only claim the portion of the home that is used exclusively for business. For a more detailed explanation of the home office deduction, ask your tax professional or refer to IRS publication 587.