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How home office deductions work

July 29, 2019

Home Office Usage

 

If you use a part of your home for business purposes, then you are in luck! The IRS allows the deduction of expenses for business-related usages of the home. This deduction is available to both homeowners and renters and applies to all types of homes. A couple options exist that vary in their complexity as it relates to the home office usage deduction as well as particular requirements that must be met for a home office to qualify.

 

Requirements

  • Regular and exclusive use of the home office is required. this means the part of your home used exclusively for conducting business must be used regularly as well. If an extra room is taken to run your business, you can take a home office deduction for that extra room.

  •  It must be proven that your home is the principal place of business. Work can be done outside of your home, although a substantial and regular part of it must be conducted in-house. For example, in-person meetings held at your house may be deducted for the part of the home used even though business is also carried outside of it. A free standing structure may also be deducted like a studio, barn, or garage.

 

Deduction Options

 

Simplified Option

  • Significantly reduces the burden of record keeping by allowing the taxpayer to use a standard rate. This rate allows for a deduction of $5 per square foot of home used for business (Max. 300 SQFT).

  • Allowable home-related itemized deductions claimed in full on Schedule A (i.e. mortgage interest or real estate taxes).

  • No home depreciation deduction or recapture of depreciation is used.

Regular Method

  • One must determine actual expenses of the home office with this method. This can include mortgage interest, insurance, utilities, repairs, and depreciation. Generally, deductions are based on the percentage of home devoted to business use, so the percentage of the room or part of room used for business must be calculated.

 

This deduction is not limited to business owners. If you are an employee and use part of your home for business, a deduction may apply for you as well. This is possible when the work being done is in the interest of the convenience of the employer. Additionally, one must not rent any part of their home to their employer.

 

Finally, it is important to keep in mind that both of these methods are equally adequate and can be used for any taxable year. You should choose which deduction method you would like to use when your original Federal income tax return is filed and once a method is chosen, one cannot switch methods during the same taxable year.

 

Information obtained from the Internal Revenue Service website.

 

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