Many people in today’s work environment use a designated space in their home as an office. One of the most frequent questions I receive during tax season is “Can I deduct expenses for my home office?” This often triggers no less than half a dozen questions on my part. What the average taxpayer does not realize is that the IRS has some very specific rules relating to home office deductions.
If you are a business owner or self-employed, 1. The space must be used “regularly and exclusively” for conducting business. 2. You must show your home as your principal place of business. If you conduct business at a location outside of your home, it does not mean that your home is not your principal place of business. You, the taxpayer, just need to show that your home is substantially and regularly used to conduct business.
If you are an employee, 1. Your business use must be for the convenience of your employer. 2. You must not rent any part of your home to your employer and use the rented portion to perform services as an employee of that employer.
If you qualify for a deduction, based on the above rules, there are two ways to calculate your deduction. The first is the Regular Method, which is a calculation based off the actual expenses of your home. These expenses would include mortgage interest, insurance, utilities, repairs and depreciation. These expenses are then prorated based on the square footage of your home used for work. The second method is new for 2013 and is called the Simplified Option. The Simplified Option will be calculated by multiplying a prescribed rate (currently $5) by the square footage of your home used for a qualified business use.
If you meet the above rules, give me a call to discuss the proper way to take the deduction on your tax return. The deduction is reflected on different forms for self-employed individuals vs. an employee with a home office. In addition, there are several additional rules related to depreciation, listed property, the sale of a home that has had a home office deduction, and daycare providers. For additional information you can always refer to IRS Publication 587, Business Use of Your Home, or give me at PFBF CPAs a call.
Alison Royall, CPA, Tax Manager