How To Get a Tax Deduction For Home Office Expenses

A taxpayer may get a home office expense deduction in computing income tax in the USA. The home office deduction is allowed only if specific requirements are met.{26 USC 280A} First, the portion of the home must be used exclusively and regularly for business. Second, the use must be either as the principal place of business or by customers in regularly dealing with the taxpayer. Use of a separate structure (such as a freestanding office) not attached to the taxpayer’s home is also a qualified use. Expenses may include rent, depreciation, utilities, maintenance, interest, and property taxes. Only those expenses directly connected or apportioned to the business portion are deductible. Interest and taxes deducted as home office expenses reduce otherwise allowed itemized deductions. A new $5 per business square foot deduction may be elected. See IRS Form 8829 and instructions.

To get the deduction in computing income tax, a specific portion of the taxpayer’s home must be used solely for business. If the portion is also used for personal purposes, no deduction is allowed. However, a wholesale or retail seller whose home is the sole fixed location of the business may deduct the costs apportioned to the part of the home used for storing inventory or samples on a regular basis if the space is separately identifiable.

Example: Jane sells custom dresses for several seamstresses. She stores dress samples in one half of a walk in closet. Jane should be able to deduct the expenses for half of the closet. Also, a taxpayer who uses the home regularly to provide day care services need not meet the exclusive use test. The daycare exception is available only if the day care center is either licensed or approved or not required to be licensed or approved under state law.

Where the office is a separate structure, the principal place of business or customers rule does not apply. Generally, expenses related to a separate structure (such as a freestanding office) used exclusively for business are fully deductible.

Expenses for the business use of the taxpayer’s home directly related to the business are deductible in full. These may include separately stated property taxes or insurance on the business property. Other home expenses must be apportioned between the business and non-business parts of the home. Such expenses include rent, utilities, insurance, repairs, and other expenses. The apportionment is based on the square feet used for business, or on the hours used for a day care business, compared to the total square feet or hours.

Interest and property taxes related to business use are treated as business expenses rather than itemized deductions, and are deductible even if they exceed the net income of the business. The deduction for other home office expenses is limited to the net income from the business (generally reported on Schedule C). Any excess deduction is treated as a potential deduction in the succeeding tax year.

An employee is allowed a deduction for home office expenses only if an additional requirement is met. The use of the home must be for the convenience of the employer. Employee home office expenses are taken as miscellaneous itemized deductions.


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