For many taxpayers today, their homes are more than the place where they live, sleep and take meals with their families. It's not uncommon for employers and employees to work from home.
If this describes you, there are some federal tax benefits you need to know about. Specifically, there's a tax deduction for the business use of your home that could reduce your tax bill significantly.
"Home Office" Deduction
The tax deduction for the business use of your home is often called the home office deduction. There are different requirements for self-employed workers and those who work for others. Nonetheless, the basic requirement is the same for both types of workers: In order to deduct expenses in connection with the business use of a home, it must be used on an exclusive and regular basis for trade or business purposes.
This exclusive test looks at the use of a space during the entire day. For instance, even if you use a specific part of your home for business purposes from 9-5 Monday through Friday, it's not being used on an exclusive basis if your child uses the space for doing homework in the evenings.
Who and What Qualifies?
To qualify for the deduction, part of your home must be:
- The principal place of business for your trade or business
- The place where you meet and deal with your patients, clients or customers
- Used in connection with your trade or business if you use a separate structure unattached to your home, like a garage
In addition, if you're an employee, you can take the deduction only if:
- Your business use is for the convenience of your employer, and
- You don't rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer
For example, as a teacher you're required to teach and meet with students at the school and to grade papers. You have an office, and the school doesn't require you to work at home. However, you like to use an office in your home to grade papers, prepare lesson plans, etc. You can't take the deduction because the business use of your home isn't for the school's convenience - it doesn't require you to work from home.
Also, there's no difference between a house and an apartment. So, you may be able to deduct a portion of the expenses of your apartment used for work purposes.
How Much of a Deduction?
Generally, the amount of your deduction for whole-house related expenses, like utilities, is limited to the square footage of the area you're using for business purposes. However, there are some expenses that are fully-deductible, like a cell phone that's used for business only.
For example, your home is 2,000 square feet and you use 200 square feet as your home office. You can take a deduction of 10 percent of your whole-house expenses. So, if your homeowner's insurance is $1,000, then $100 is deductible.
Other examples of deductible expenses include depreciation, mortgage interest and real estate taxes.
Limits on the Deduction
If your gross income from the business use of your home is at least equal to your total business expenses, you can deduct all of your expenses.
If your gross income is less than your total business expenses, there's a deduction limit. Your deduction for (1) maintenance, insurance and utilities, and (2) depreciation (in that order) is limited to the gross income minus the sum of:
- The business part of expenses you could deduct even if you didn't use your home for business, such as mortgage interest and real estate taxes
- Expenses directly related to the business, such as a business phone and supplies
For example, your gross income from the business use of your home is $6,000. The deductible mortgage interest and real estate taxes total $3,000. Your direct business expenses are $2,000. The business-related part of your expenses for maintenance, insurance and utilities is $800. Depreciation is $1,600.
The deduction limit here is $1,000, or $6,000 - ($3,000 + $2,000).
You can deduct all of the mortgage interest and real estate taxes and direct business expenses. You can deduct all maintenance, insurance and utilities expenses, too, because they're less than the deduction limit. Your depreciation deduction is limited to $200, however: $1,000 - $800.
How Do I Take the Deduction?
If you're self-employed and normally file Schedule C with Form 1040, you need to complete and attach Form 8829.
Most employees have to itemize deductions on Schedule A with Form 1040 to claim a deduction for the business use of their homes, along with any other work-related expenses they have.
Taking the deduction properly can be complicated, so look over the IRS instructions and examples carefully. If you have any questions while preparing your return, talk to a professional tax preparer or a tax lawyer before you file.
Questions for Your Attorney
- I didn't know about the home office deduction when I filed my taxes last year. Can I claim those expenses on this year's return?
- If I run more than one business from my home office, do I have to divide my deduction between them?
- Do I have to work full-time to claim the deduction? What if I only work part-time, and don't use that space for anything else?
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