Hi I’m Katie. I’m a mom, a wife, a tax advisor, a blogger, and I market health and wellness products.
One of the biggest questions I get from people each year is about the Office In Home part of the tax return. Sometimes referred to Home Office Expense, Home Office Deduction, or Business Use of Home. Whatever you want to call it, its all the same thing.
For more information or clarification on anything I mention today: talk to your tax advisor or read Publication 587 from the IRS.
To make things easier on everyone, I’m going to focus most of my attention on who can deduct office in home expense and what expenses are deductible. I’ll save the discussion about how to calculate the deduction for a later time. Hopefully you’ll be using a paid tax preparer and they will be calculating the deduction for you.
In order to deduct any expenses for your home as business expenses, you need to meet the following rules:
Rule: You must regularly use part of your home exclusively for business.
There are actually two tests being met with this rule. The regular test and the exclusive test. To qualify under the regular use test, you must use a specific area of your home for business on a regular basis. In order for part of your home to pass the exclusive test, the area of your home that you are using for business CANNOT be used for anything else.
The exclusive test is a hard one to pass. Lets say you have an office set up in your home that you are doing your work in, but it doubles as your guest room. There is no deduction. What if you work in your office by day, but your kids are playing games in it by night? Again, no deduction.
I advise my clients that are looking into deducting the business portion of their home to make sure that only things that are ordinary and necessary for their business be in the room. No guest bed, no exercise equipment (unless you are a personal trainer in your home), no couch (unless you need it for your clients).
Rule: You must show that you use your home as your principal place of business.
If you do the bulk of your work in an office or studio away from you home, you may not be able to deduct the portion of your home that you are also using for business. This rule has a little bit of wiggle room, so definitely talk to your tax advisor if you are working in more than one location.
Rule: If you are an employee and you use part of your home for work, you may also qualify for a deduction.
In order for an employee to deduct any portion of their home for work, you must pass the rules listed above, plus:
- Your business use must be for the convenience of your employer, and
- You must not rent any part of your home to your employer
What expenses are deductible?
Now that we’ve determined who can claim the expenses for having an office in their home, now lets talk about the expenses that you can deduct. Please remember that every situation is unique and there is no way for me to list every single thing that can be deducted. Please talk to your tax advisor if you have more questions about the things you can/cannot deduct.
- Mortgage interest
- Real estate taxes
- Rent (if you don’t own your home)
- Utilities (only those that attributable to your office like gas and electricity. Water makes sense if you have a salon or a bathroom that your clients use)
- Equipment (computers and such)
- Repairs and maintenance (including paint/wallpaper)
Keep in mind that you are not using your entire home as your office, therefore you cannot deduct 100% of the expenses for things like your mortgage interest, real estate taxes, and utilities. Calculating the business portion of those items is relatively easy though.
Total square footage of home / Square footage of space used for business = Business use percent
Expenses such as your decorations and furniture will be fully deductible since they stay in your office and are 100% business use.
I hope that helps! If you need more information, email me or call your personal tax advisor.