August 19, 2014
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On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
Article Highlights:
Generally, expenses related to the rent, purchase, maintenance and repair of a personal residence are not deductible. However, if you use part of your home for business purposes, you may be able to take a deduction for the business use of your home on your self-employed business schedule. This deduction is commonly referred to as the home-office deduction, but it need not necessarily be an “office” to qualify.
Expenses that can be deducted include the business portion of real estate taxes, mortgage interest (but not principal payments), rent, utilities, insurance, painting, repairs and depreciation. Expenses that are for both the business-use and non-business-use areas of the home (example: real estate tax) are prorated, generally in the ratio of the square footage of the office area to total square footage of the home, unless an expense is exclusive to the office (example: painting only the office area). As an alternative, the IRS provides a safe harbor deduction as explained below.
In order to claim a deduction for the business use of your home, you must use part of your home exclusively in your trade or business on a regular , continuing basis. You must be able to provide sufficient evidence to show the use is regular. Exclusive use means there can be no personal use (other than de minimis) at any time during the tax year. Use of only a portion of a room is acceptable as long as the taxpayer shows that section is totally for business. In addition, one of the following must apply:
“Exclusive use” means a specific area of the home is used only for trade or business. “Regular use” means the area is used regularly for trade or business. Incidental or occasional business use is not regular use. In addition, employees must deduct the office as a miscellaneous itemized deduction, which has three additional limitations: the employee must itemize deductions (can’t take the standard deduction), this type of miscellaneous deduction is reduced by 2% of AGI (income), and it is not deductible at all to the extent the taxpayer is subject to the alternative minimum tax (AMT). Non-business profit-seeking endeavors, such as investment activities, do not qualify for a home office deduction, nor do not-for-profit activities, such as hobbies.
Example: An attorney uses the den in his home to write legal briefs or prepare clients’ tax returns. The family also uses the den for recreation. The den is not used exclusively in the attorney’s profession, so a business deduction cannot be claimed for its use.
As an alternative, where taxpayers (either self-employeds or employees) meet the qualifications for deducting business use of the home, they can elect a simplified deduction rather than itemizing expenses. This simplified method is referred to as the “safe-harbor” method and allows a deduction of $5 per square foot with a maximum square footage of 300. Thus, the maximum deduction is $1,500 per year. This method can be used in any year in lieu of the regular method.
If you have questions regarding how the home office deduction might apply to your unique situation, please give this office a call.
- Home Office Deduction
- For Self-Employed Individuals
- Employee Home Office Issues
- Safe Harbor Home Office Deduction
Generally, expenses related to the rent, purchase, maintenance and repair of a personal residence are not deductible. However, if you use part of your home for business purposes, you may be able to take a deduction for the business use of your home on your self-employed business schedule. This deduction is commonly referred to as the home-office deduction, but it need not necessarily be an “office” to qualify.
Expenses that can be deducted include the business portion of real estate taxes, mortgage interest (but not principal payments), rent, utilities, insurance, painting, repairs and depreciation. Expenses that are for both the business-use and non-business-use areas of the home (example: real estate tax) are prorated, generally in the ratio of the square footage of the office area to total square footage of the home, unless an expense is exclusive to the office (example: painting only the office area). As an alternative, the IRS provides a safe harbor deduction as explained below.
In order to claim a deduction for the business use of your home, you must use part of your home exclusively in your trade or business on a regular , continuing basis. You must be able to provide sufficient evidence to show the use is regular. Exclusive use means there can be no personal use (other than de minimis) at any time during the tax year. Use of only a portion of a room is acceptable as long as the taxpayer shows that section is totally for business. In addition, one of the following must apply:
-
It is the
principal place of business
for a trade or business of the taxpayer;
-
It is used for
storing inventory for a wholesale or retail business
for which the taxpayer’s home is the only fixed location of the business;
-
It is a place where the
taxpayer meets with customers, patients or clients
(just telephone contact with clients isn’t enough to meet this test);
-
It is used as a
licensed day care center
; or
- It is in a separate structure not attached to the taxpayer’s home.
“Exclusive use” means a specific area of the home is used only for trade or business. “Regular use” means the area is used regularly for trade or business. Incidental or occasional business use is not regular use. In addition, employees must deduct the office as a miscellaneous itemized deduction, which has three additional limitations: the employee must itemize deductions (can’t take the standard deduction), this type of miscellaneous deduction is reduced by 2% of AGI (income), and it is not deductible at all to the extent the taxpayer is subject to the alternative minimum tax (AMT). Non-business profit-seeking endeavors, such as investment activities, do not qualify for a home office deduction, nor do not-for-profit activities, such as hobbies.
Example: An attorney uses the den in his home to write legal briefs or prepare clients’ tax returns. The family also uses the den for recreation. The den is not used exclusively in the attorney’s profession, so a business deduction cannot be claimed for its use.
As an alternative, where taxpayers (either self-employeds or employees) meet the qualifications for deducting business use of the home, they can elect a simplified deduction rather than itemizing expenses. This simplified method is referred to as the “safe-harbor” method and allows a deduction of $5 per square foot with a maximum square footage of 300. Thus, the maximum deduction is $1,500 per year. This method can be used in any year in lieu of the regular method.
If you have questions regarding how the home office deduction might apply to your unique situation, please give this office a call.
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