Home Office Deduction IRS Requirements & Benefits

Written by Advertorial | Posted in Advertorial • Small Business • Tax Deductions

Many tax professionals like the ability to transfer their home into their office, since it allows for greater flexibility of time. There are also tax benefits when somebody sets apart a place in their home to create a home office. This post from MileIQ www.mileiq.com/taxpros) gives us the tax benefits and requirements for establishing a home office in order to apply for the tax deduction on business miles from the IRS.

The home office deduction can save you taxes. It allows you to deduct a part of your rent or mortgage payments, utilities and other home expenses. A tax-deductible home office can also increase your business mileage deduction. Yet, there are many requirements you must meet to qualify for the deduction.

The Home Office Deduction

A home office is a place in your home that is used exclusively for business purposes. The IRS offers taxpayers a home office deduction to offset a portion of the costs of their home offices.

The home office deduction allows independent contractors, small business owners and others to lower their taxable income. In general, it’s meant for independent contractors but there are circumstances where W2 workers

Home Office Requirements For Tax Purposes

To qualify for this deduction, you must meet three threshold requirements:

you must be in business (employees in someone else’s business can also qualify)
you must use part of your home only for business (unless you store inventory at home or run a day care center)
you must use your home office for business on a regular basis.

You must meet all three threshold requirements. Additionally, you must also meet any one of the following requirements:

your home office is your principal place of business
you regularly and exclusively use your home office for business activitives. This could include managerial or administrative work
you meet clients or customers at home
you use a separate structure on your property only for business purposes
you store inventory or product samples at home
you run a day care center at home.

Rule #1: You Must Be In Business

You must be in business to take this deduction. You can’t get the deduction for a hobby or other nonbusiness activity that you conduct out of your home. Yet, you don’t have to work full time in a business to qualify for this. If you meet the requirements, you can take the deduction for a side business.

If you’re an employee in someone else’s business, you can qualify for the deduction. But, there is an extra threshold you’ll need to meet: the convenience of the employer test.

Rule #2: You Must Use Your Home Office Only For Business

You can only take this deduction if you use part of your home only for your business. If your home office is also used for personal reasons, you won’t qualify for the deduction. The more space you devote only to your business, the more your deduction will be worth.

Rule #3: You Must Use Your Home Office Regularly

It’s not enough to use a part of your home only for business—you must also use it regularly. You can’t place a desk in a corner of a room and claim this deduction if you almost never use the desk for your business.

How much is “regularly?” It’s not clear. The IRS only says you must use your home office for business on a continuing basis. One court has held that 12 hours of use a week is enough. There is a good chance that you could also qualify with less use but no one knows for sure. You can keep track of how much you use your home office by making simple notations on a calendar.

One More Rule

You also must meet at least one of the following requirements to qualify for this deduction.

Your Home Is Your Principal Place Of Business

The most common way to meet the extra rule is to show that you use your home as your principal place of business. How you do this depends on where you do most of your work and what type of work you do at home. If you do all or almost all your work in your home office, your home is your principal place of business. You’ll have no trouble qualifying for the is deduction.

If you work in more than one location, your home office can still be your principal place of business. This happens if you perform your most important business activities at home.

Your principal place of business is where you spend more than half of your time if you work at many locations. Thus, if you spend more than half of your time in an office provided by your employer, you won’t qualify.

You Do Administrative Work At Home

This deduction applies if you use the office for business administrative or management tasks. There must be no other fixed location where you can do these activities.

Administrative or management activities include, but are not limited to:

billing clients or patients
keeping books and records
ordering supplies
setting up appointments, and
writing reports.

For example, a person drives for Uber or Lyft can qualify for this deduction if they do bookkeeping at home.

You don’t have to perform all the administrative activities at home to qualify. Your home office can qualify for the deduction even if you:

have others conduct your administrative or management activities at locations other than your home
do business activities at places that aren’t fixed locations for your business. This could include a car or a hotel room
occasionally do minimal business activities at a fixed location outside your home. This could include your outside office or a coffee shop.

You Meet Clients Or Customers At Home

You may deduct expenses for any part of your home you use only to meet with clients, customers or patients. This applies even if your home office is not your principal place of business.

You must physically meet with others in this home location; phoning them from there is not enough. The meetings must also be a regular part of your business. Occasional meetings don’t qualify. The IRS has indicated that meeting clients one or two days a week is enough to meet its requirements.

You Use A Separate Structure For Business

You can also deduct expenses for a separate free-standing structure. This could include a studio, garage or barn. You can only deduct it if you use it only and regularly for your employee work. The structure does not have to be your principal place of business. Nor does it need to be a place where you meet patients, clients, or customers.

You Store Inventory Or Product Samples At Home

You can also take the home office tax deduction if you sell products and you store inventory or product samples at home. To qualify, you can’t have an office or other business location outside your home. And you must store your inventory in a particular place in your home like a garage or closet.

Employees Only: Your Home Office Is For The Convenience Of Your Employer

You may only take the home office deduction if the home office is for the convenience of your employer. Your home office is at the employer’s convenience only if it is:

a condition of employment
necessary for the employer’s business to properly function, or
needed to allow the employee to properly perform his or her duties.

This test is not met if using a home office is for your convenience or because you can get more work done at home. You won’t pass the test if you have an outside office provided by your employer but like to take work home with you. Yet, you would pass the test if your employer doesn’t provide you with an office.

Even if you don’t qualify for the deduction, you may still get your employer to reimburse you. The reimbursement would not be taxable income so long as you account for your expenses.

How Much Is The Standard Home Office Deduction?

You can calculate your home office deduction using the traditional method or the optional simplified method. Either way, you can’t deduct more in any year than the profit you earn from your business. Any amounts you can’t deduct this year may carried forward. This can be deducted in future years when you have more profit.

Traditional Method: Tax Write Off For Home Office

The traditional method includes the actual expenses you incur for your home. Such expenses fall into two broad categories: direct and indirect. Direct expenses are what you incur just for your home office. This can include costs like painting your home office or paying someone to clean it. The entire amount of a direct home office expense is deductible.

An indirect expense is a payment for something that benefits your entire home. Most of your home office expenses will be indirect expenses, including:

rent, if you rent your home or apartment
mortgage interest and property taxes , if you own your home
depreciation, if you own your home
utilities
insurance, and
home maintenance expenses for your entire home.

You can only deduct part of an indirect expense: the percentage which relates to your home office. For example, let’s say you’re a renter and use 20% of your home for your home office. You’ll be able to deduct 20% of your rent, utilities and other indirect expenses.

Simplified Home Office Deduction:

The IRS has created an optional simplified method of calculating it. You deduct $5 for every square foot of your home office. Thus, all you need to do is measure the square footage of your home office.

For example, if your home office is 200 square feet, you’ll get a $1,000 deduction. That’s all there is to it. You can only use this method if your home office is 300 square feet or less.

The Home Office Deduction Can Increase Your Mileage Deduction

If you drive for your business, using the home office deduction can increase your mileage deduction. This is because it can cut out the IRS’s commuting rule. The IRS says that personal commuting is not deductible. Thus, for example, you can’t deduct the cost of driving from home to your regular outside office.

For professionals like Uber drivers, this can sting. The commuting rule prevents you from deducting the cost of driving from home to pick up your first ride. This same rule applies to the drive home from your last ride.

That changes if you have a qualifying home office. Your home office qualifies as your principal place of business if:

it’s the place where you earn most of your income
it’s where you perform most of your administrative or business management tasks.

You can increase your deductions for business trips with a qualifying home office. For example, you can deduct driving from home to an outside office. You can also deduct driving from home to pick-up a passenger if you’re a Uber or Lyft driver.