What Qualifies as a Home Office Tax Deduction?

For those who are self-employed, or own their own business, you may already work from a home office or are interested in adapting the practice. In this article, we will offer some suggestions on how you may get a home office tax deduction. For starters, the first thing to note is that employees are not eligible for a home office tax deduction. This particular type of tax deduction is reserved for the owner(s) of the company or even the company as a whole in some cases. Before you file for a home office tax deduction, our accounting firm highly recommends you consult with a trusted financial advisor. 

How to Qualify For Home Office Tax Deductions

The first step to finding out if you qualify for the home office deduction is to calculate it on Form 8829 from the IRS which is available to homeowners and renters. After this, there are a few requirements that need to be met for the taxpayer’s home to qualify.

1. A portion of the house must be exclusively used for office purposes and business must be conducted in the home office on a regular basis.
2. The home office is where the majority of the work is conducted, making it the principal place of business. Taxpayers can also meet this requirement by conducting administrative and management activities in the home so long as the home office is again the primary place in which these business activities take place. 
3.  If there is a separate structure not attached to the home, it may qualify for a home office deduction. Just like in the case of your house, this structure must be used exclusively and regularly for business purposes. 

Home Office Stipulations for Tax Deductions

It is important to remember that there are specific requirements that need to be met to receive home office deductions. Factors that can impact this include but are not limited to:

• Location
• Property type/size
• Business format
• Hours of operation

How do I calculate my home office tax deduction?

Qualifying taxpayers usually choose one of two methods to determine their home office expense deduction. The most straightforward option is to claim $5 per square foot of your home office. However, this option only allows you to claim a tax deduction for up to 300 feet of your home office, or a maximum deduction of $1,500. A second option allows you to base the tax deduction on the percentage of your home devoted to business use. This option is more commonly used because many home offices exceed 300 feet. This tax deduction works well for those who use a whole room versus a part of a room for conducting business. Considering your home office business deductions will be based either on a percentage of your home used for business or the simplified square footage calculation, the most precise way to calculate the percentage for tax purposes is to measure the square footage of your home office and divide it by the total square footage of your home. For example, if your home office measures 150 square feet and the total area of the house is 1,200 square feet, you would have a business percentage of 12.5%. 

If all of the rooms in your house are roughly the same size, you may determine the business percentage by dividing the number of rooms used for business purposes by the total number of rooms in the house. One stipulation to keep in mind is that if you want to qualify for home office deductions under the daycare exception, you will need to pass the exclusive use test. In other words, if you use your home for an office as well as a daycare facility or another home-based service, this rule applies to you. In short, your business must use a reduced space because it is also being used for personal reasons. In this case, you would first compare the number of hours a childcare business is operating. For example, if you use 40% of your house for the daycare business and it operates for 9 hours a day, 5 days a week, that is roughly 50 hours a week you will spend tending to the business. Based on your weekly hours, you can generate a yearly report and divide the estimated yearly hours by the number of hours actually used at the end of the year. The percentage you get from this calculation is what will be deducted from your home office tax deduction. 

Of course, due to the nature of everyone’s lives, there is not a one-size-fits-all percentage that works for everyone. The one universal concrete practice our accounting firm recommends is to consult with an experienced financial advisor on which calculation with yield the best tax deduction for you. Consulting with a financial advisor is a good opportunity to not only explore what your options are with home deductions but also if home office deductions are something you even want to consider. 

The Self-Rental Rule

The self-rental option may also be available to you. This option is best to be discussed with a tax professional, as the rules get a bit complex, but it essentially involves renting a portion of your home to your business. The self-rental rule can have negative tax consequences if it is not used properly. To that end, we encourage you to schedule a complimentary consultation with Matthew Shiebler, CPA of Interactive Accountants to see if this option is right for you.

Schedule a Complimentary Consultation with a CPA Near You

Interactive Accountants was built on the fundamental principle of business growth. If you are a business owner and believe you may qualify for a home office tax deduction, we invite you to schedule a complimentary consultation with our trusted accountants. Our firm will help you determine which calculation will best benefit you. Beyond the information we have presented in this article, we also focus on accounting for law firms, accounting for medical professionals, accounting for eCommerce, accounting for restaurants, and more. If you are a business professional who needs guidance on the home office tax deduction rule, our lead CPA has 25 years of professional accounting experience and is ready to assist you.