So what exactly does one have to do in order to qualify to write-off expenses for the business use of the home? And what expenses qualify for the deduction?
First, in order to qualify for the deduction, part of the home must be used:
- Exclusively and regularly as the principal place of business, or
- Exclusively and regularly as a place to meet or deal with patients, clients, or customers in the normal course of the trade or business, or
- In the case of a separate structure which is not attached to the home, in connection with the trade or business, or
- On a regular basis for certain storage, or
- For rental use, or
- As a daycare facility.
Secondly, there are additional requirements for employees that must be met to qualify part of the home for business use and the coveted tax deduction. Those requirements are:
- The business use must be for the convenience of the employer, and
- The employee must not rent any part of the home to the employer and use the rented portion to perform services as an employee for that employer.
If the use of the home office is merely appropriate and helpful, expenses cannot be deducted for the business use of the home based on those merits alone.
Deductible Home Office Expenses
Regardless of whether or not one decides to deduct expenses related to the business use of the home, certain expenses may be already be deductible. Such expenses include:
- Real estate taxes,
- Qualified mortgage insurance premiums,
- Deductible mortgage interest, and
- Casualty losses.
Other expenses are only deductible if one uses a part of the home for business. Examples of these expenses include:
- Depreciation of the home,
- Homeowner’s/Renter’s insurance,
- Security systems, and
- Utilities and other services.
To determine the amount eligible for the deduction, the percentage of the home used for business purposes is multiplied by the total amount of the expense. The business percentage can be determined using any reasonable method; however, there are two commonly used methods for figuring the percentage (see below).
- Divide the area (length multiplied by the width) used for business by the total area of the home, or
- If the rooms in the home are all about the same size, divide the number of rooms used for business by the total number of rooms in the home.
Where to Write Off Home Office Deductions on a Tax Return
So where is the home office deduction taken on a federal income tax return for an individual? It depends. Self-employed individuals will take the deduction on Form 8829, Expenses for Business Use of Your Home. Employees will take the deduction on Form 1040, Schedule A – Itemized Deductions. Note that for employees only amounts over 2% of the adjusted gross income (AGI) will be deductible.
Simply Taxes, LLC is a local year-round tax preparation firm with an office located in North Raleigh. Our Raleigh accountants are ready to work one-on-one with you to help maximize your refund opportunity and to provide other tax services in a professional manner.
The information contained within this article is for general guidance only. As such, it should not be used as a substitute for consulting with professional accounting, tax, legal or other competent advisers.
Source: IRS Publication 587 – Business Use of Your Home (2011)