March 15, 2019
It’s tax season. Knowing that the gig worker is often at home working hard—it’s important to understand how your workspace affects your tax return. The home office expense still elicits occasional eye rolls from tax professionals who are well aware of its historical misuse and abuse. And some taxpayers avoid claiming legitimate home office expenses, for fear of getting audited.
Certified number crunchers often did little to allay their worries. (Maybe they thought avoiding the line item deductions kept their jobs simpler.) However, back in 1994 the U.S. Supreme Court made it easier for taxpayers to qualify for this deduction, and by 2007 Congress stepped up and simplified it more.
Here’s a brief overview but be sure to consult with your CPA on how to manage this information and tax questions you may have.
Your home office is considered deductible if:
- It’s your “principal place of business” OR
- You use it to meet clients, patients, or prospects in the standard course of your trade or business OR
- It’s a separate structure not attached to your dwelling unit
Most deductible home offices qualify under Rule #1 of IRS Publication 587 Business Use of Your Home. The section states that your home office qualifies as your principal place of business if:
1. You use it “exclusively and regularly for administrative or management activities of your trade or business”
2. “You have no other fixed location where you conduct substantial administrative or management activities of your trade or business”
This is true even if you have another office, as long as you don’t use it more than occasionally for administrative or management activities. And it’s true even if you belong to a co-working space. You also can claim that membership on your return.
Take for instance: You’re a real estate agent and you have a desk at your broker’s office. Your home office qualifies as your principal place of business as long as you use it as the space where you manage your business and keep your books. (You don’t regularly do those tasks at your desk in your broker’s office.)
Your home office doesn’t have to be an entire room. It can be part of a room as long as it meets the requirements. You also can claim a workshop, studio, or other “separately identifiable” space you use to store products or samples. If you use it for more than one business, both have to qualify to take the deduction.
You have to use your office regularly (defined as 10 to 12 hours weekly) and exclusively for business.
To prove your deduction, keep a log and take photos to record your business use.
Once you’ve qualified, you can start deducting expenses. If your business is taxed as a proprietorship, use Form 8829. If you’re taxed as a partnership or corporation, home office expense should be reimbursed since there’s no separate form, which helps you fly under the radar.
- Start by calculating the “business use percentage” of your home. You can divide by the number of rooms if they’re roughly equal, or calculate the exact percentage of the home’s square footage the office occupies. If you use the second method, common areas such as halls and stairs can be excluded to boost the overall business-use percentage.
- Next, you’ll deduct your business-use percentage of your rent or your mortgage interest and property taxes. Deducting those expenses on your business return can save you more than on your personal return. (For example, if your state and local taxes are higher than $10,000, you’ll sidestep that limit for the portion of property taxes attributable to the home office.)
- You’ll depreciate the business-use percentage of your home’s basis (excluding land) over 39 years as nonresidential property.
- Finally, deduct your business-use percentage of utilities, repairs, insurance, garbage pickup, and even security.
Are there any expenses you can allocate directly to your home office? Maybe you spent extra to renovate the room. Perhaps you have especially high electric bills for home office equipment? You can claim those as “direct” expenses.
It’s also perfectly within reason to deduct the cost of furnishing, carpeting, and decorating your home office. But don’t push your luck! If you pick up a Picasso at auction, you can’t claim it as a deduction because you hang it in your office.
You can use home office expenses to reduce taxable income and self-employment income from your business, but not below zero. If these expenses in a particular year are more than your net income from your business, you can carry forward the loss to future years.
Ultimately, if this all seems like too much work, there’s a new “safe harbor” method that lets you claim a flat $5 per square foot (regardless of your actual expenses) for up to 300 square feet of qualifying home office space (regardless of what percentage it occupies in your home). If you use the safe harbor, you’ll continue to deduct your mortgage interest and property tax on Schedule A. However, you’ll forego any depreciation deduction. And if that deduction reduces your business income below zero, there’s no carrying forward the loss.
The safe harbor is certainly easier than the traditional method. However, using it might not let you claim as much as with the traditional method. The only way to know for sure is to calculate the deduction both ways.
And finally, claiming a home office can also boost your car and truck deductions, because it can minimize or even eliminate nondeductible commuting miles for that business.