Should I Claim the Home Office Deduction?
The deduction of home office expenses is one of the most aligned-aligned areas of tax law for both the service and taxpayers alike. Fraught with changes in tax code itself and misinterpretations of taxpayers this section of the code is one that causes much consternation amongst all. Generally the deduction can be taken as a portion of your basic living expenses for your accommodations for owners of a house or condo and those who live in an apartment or mobile home.
The two general guidelines are:
- The property needs to serve as your business’s principal location of business or trade.
- It must be a place that you meet or deal with your clients, customers, or patients in the normal performance of your business.
Furthermore the location needs to be an area in your home that you use regularly and exclusively for business. The amount of the deduction depends on the size of the area exclusively used for your business and by tax law can be determined/calculated by either the number of rooms or the applicable square footage. The taxpayer can use whichever of these two methods is to their best advantage. Though businesses can have other physical locations, the home office in order to qualify, has to be the business’s primary location. Also, to maintain the integrity of the deduction, the area set aside for business use cannot also be used personally, even if during non-office hours. Furthermore please note that incidental or occasional business use does not qualify.
— Duluth CPA, John Dillard CPA
If you are self-employed, the expenses are reported on schedule C of your personal return and are only deductible to the extent that revenues of the business exceed expenses (i.e., the home office expenses cannot be used to create a tax loss from the business). If you are an employee, you have one more hurdle to address to ensure that you qualify in addition to the regular use and exclusivity rules above: your home office must be for the convenience of your employer. Home office expenses of employees are ultimately reported as an itemized expense on Schedule A.
Home office expenses can include real estate taxes, mortgage interest, rent, utilities, insurance, painting, repairs, regular maintenance, and depreciation. Please note that when calculating the deductible percentage of these expenses, you should use the prorated portion of the business use percentage relative to the total size of the home (allocated based upon room size or square footage as described above).
Should Your Business Take a Home Office Deduction?
For business owners who operate their business out of their home, tax law allows you to deduct the prorated portion of the home being used exclusively for business. Thus, the dining room where you entertain guests will not qualify unless you take the dining room table out and put your office in there, using it solely for that purpose.
However, due to tax law allowing only to deduct the building and not the land, the building being depreciated over an extended time period, and that you are only able to deduct the business portion of the home, I find it generally not advantageous to take the deduction. Given the limitation of the deduction that tax law requires, I have generally found that the burden of the record-keeping for both the client and myself to be unduly burdensome for the limited amount of tax savings afforded.
I advise my clients not to take a home office deduction. In evaluating all potential deductions I try to keep my client’s pocketbook in mind as spending roughly the same amount in professional fees as the tax savings allowed seems not be a primary benefit of those I serve, the client.
When you are furnishing your office whether it be in space your business or yourself own (as long as the area is dedicated exclusively to your business) the expenditures are valid payments of the business. If you operate your business out of your home this will hold true as well, however you should be sure to only deduct the prorated business use portion of expenses such as utilities. I recommend that for these expenses the business owners pay the expenses personally and then turn in an expense report to obtain reimbursement for the business use portion.
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