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The home office tax deduction is real. If you are new to working from home, you may have never used it, but this valuable tax deduction can have value for the at-home entrepreneur, freelancer, or consultant.
However, the IRS does have rules, and two of their keywords are “exclusively” and “regularly.” In other words, the workspace you claim must be used exclusively for work and not for other activities. And it must be used regularly, although that is a bit more difficult to define.
The IRS does provide some flexibility, though. While you might assume that the space you’re claiming must be your principal place of business, it can also be where you meet clients or store business inventory. It can even be a separate structure not attached to your home. For example, if your art studio is in a separate building in your backyard, it may actually be easier to claim because it’s used exclusively for business.
The math involved is based on what percentage of your home is used for work. So if you use a 10 x 12 spare room exclusively and regularly as an office, you’re using 120 square feet for work. Let’s say your house is 2400 square feet in total. So divide 120 by 2400, and you’ll see that your workspace is .05 or 5% of your home.
Chicago-based accountant, Mike Carney writes, “I always encourage taking the home office deduction if it’s legit. The room has to be a dedicated space for your work. A separate room is preferable and it can’t be a HUGE proportion of the overall square footage of the home.”
If you’re self-employed, this deduction should be no problem. However, if you someone employs you, the IRS states that your work at home must be for your employer’s convenience, not yours. So if your employer doesn’t have an office for you to report to and has asked you to work at home, you qualify. But if you work at home because you like working in your pajamas and hate riding the subway, you don’t qualify.
Some people worry that attempting the home office deduction will get them ‘red flagged’ and could lead to an IRS audit. But St. Louis accountant, Kevin McCoy says, “I think the red flag for audit thing is an urban myth. Historically, only about 1% of returns are audited, so the risk is pretty low anyway. I tend to be conservative with tax stuff, but I always tell clients if they are entitled to a deduction and have the proper documentation–take it and don’t look back.”
If you decide to take the home office deduction, this might lead you to consider taking deductions for home office expenses. For tax purposes, these expenses come in two flavors. Direct expenses pertain to the workspace you are claiming, and include things like painting your office or repairing damage to it. Indirect expenses deal with your whole house. For example, you pay an electrical bill for your entire house, not just the home office, so you can only take a partial deduction. This is another situation where having a separate structure might make your claim more simple.
When it comes time to download the specific forms, you’ll need Form 8829 (Expenses for Business Use of Your Home) if you are self-employed. Use Form 8829 to calculate your home office deduction and then include that information on Line 30 of your Form 1040 Schedule C (Profit or Loss from Business).
In general, the home office deduction is easier to justify if you’re self-employed, but if someone else employs you, remember that working at home must be for their convenience. A separate structure is easier to justify than a room inside your house, but a room inside is fine if it’s used exclusively and regularly for your business. The main thing is to keep good records. Solid documentation will justify your claim and help you through an audit just in case you’re that 1%.
For further explanation and links to forms, check out this IRS page “Home Office Deduction at a Glance.”