How to Qualify for the Home Office Tax Deduction

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How to Qualify for the Home Office Tax Deduction

Even before the coronavirus outbreak, more individuals were working from home. The personal computer, the internet, email, file sharing, and videoconferencing were all made possible by technological advances. When you combine all of these elements, you have the makings of a home office. This is a location where you can accomplish everything you do at work, but in your pjs. This arrangement is not only more convenient for many employees, but it also permits them to claim a tax credit for the use of their homes—but only for self-employed individuals.

To be qualified for the home office tax deduction, you must be self-employed as well as fulfill numerous other Internal Revenue Service (IRS) standards.

Key Takeaways

  • If you satisfy specific qualifications, you may be eligible for a home office tax deduction.
  • A home office workstation must be utilized solely and consistently for business purposes.
  • Total deductible costs cannot exceed the revenue from the firm for which deductions are claimed.
  • You may compute a home office deduction using either the regular technique or the simplified way.
  • If you are audited, be sure your deduction is correct.

Are You Self-Employed?

Are you a self-employed person who works from home? Self-employed individuals include independent contractors, single owners of firms, and freelancers. Have you been compelled to work from home as a result of the COVID-19 pandemic? Unfortunately, this does not constitute your workplace as a home office. Following the enactment of the Tax Cuts and Jobs Act in 2017, only self-employed individuals are eligible (TCJA).

Keep solid records in case you need to establish to the IRS that your home office is your principal workplace via expenditure receipts and paperwork.

Is the Space Used Only for Business?

Is your home office workspace utilized solely and consistently for business? In this test, both of these conditions must be satisfied before any deduction may be made. Simply put, the workspace is not deductible if it is utilized for both professional and personal purposes. Furthermore, the room must be utilized on a regular basis for business purposes; the IRS will not consider a location that is used just a few times per year to be a home office, even if the area is used entirely for business reasons.

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Many filers who attempt to claim this deduction but are unable to demonstrate regular and exclusive home office usage will be effectively disqualified under these standards. It is not required, however, to split off your workplace in order to deduct it, but this may be useful if you are audited. A desk in the corner of a room may count as a workstation if just a fair amount of space surrounding the desk is counted when estimating square footage.

The sole exemption to the exclusive-use criteria pertains to filers who offer childcare services for children or utilize a portion of their house for inventory storage. Because people getting care are only present during the day, the house would be utilized for daycare on a regular basis, but not entirely. House daycare costs are calculated by dividing the square footage of the home by the area used for daycare and the number of hours spent in the space for daycare by the number of hours in the year (8,760, or 8,784 in a leap year).Utility rooms, such as laundry rooms and storage rooms, may also be deductible under specific situations.

Does Your Business Qualify?

Filers with several home-based businesses must exercise caution when claiming the home office deduction. If any of their several lines of business do not match the aforementioned conditions, no home office deduction may be claimed for any of them. It’s an all-or-nothing scenario. Each individual line of business’s home office costs must fulfill the aforementioned requirements on a stand-alone basis, and if one line fails, all others fail as well.

Individuals who do not qualify for the home office deduction may still deduct all other regular business expenses. Go to the IRS website and obtain the instructions for IRS Form 2106 and Schedule C for further information on these deductions.

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How to Calculate the Home Office Deduction

There are two methods for determining a home office deduction: standard and simplified.

The conventional way of calculating the home office deduction is filling out IRS Form 8829 to determine the exact amount of deductible home office costs. The first step in calculating expenditures is to calculate the square footage of the office and divide it by the overall square footage of the house. Here’s an easy example:

  • Step 1: Determine the size of your home office. If your home office is 15 feet by 15 feet, the total square footage is 225 square feet (15 feet 15 feet = 225 square feet).
  • Step 2: Determine the square footage of your house. Assume your house has a total square footage of 1,600 square feet.
  • Step 3: Divide the size of your workplace by the size of your home. In our case, 225 1,600 = 0.14 (about 14%). This number shows the proportion of your total household costs that may be deducted for a home office.

After determining the percentage of your household expenses that can be deducted, you must list all of the expenses for the year that pertain to your entire home, such as mortgage interest, real estate taxes, insurance, utilities, and depreciation, in the section titled “Indirect expenses” of Form 8829.

Expenditures spent purely for the benefit of the office space are subsequently noted in the form’s “Direct expenses” section. The indirect expenditures are totalled and multiplied by the previously calculated proportion (14% in our case). The total of indirect expenditures is then added to the total of direct expenses.

The simplest method is to multiply an IRS-determined rate by the square footage of your home office. You cannot deduct depreciation or home-related itemized deductions if you pick the simple option, and your home office cannot be greater than 300 square feet.

Deductions vs. Income

Are your deductions more than your income? To be eligible for the home office deduction, your total deductible costs must not exceed the revenue generated by the firm for which the deductions are claimed.

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For example, if your total deductions are $1,200 but you only made $950 from your firm, you may only claim $950 in deductions for that year. The rest, however, may be carried forward to a subsequent year and deducted when company revenue exceeds costs.

Who is considered self-employed?

A self-employed individual makes money by directly contracting with a trade or company rather than working for an employer who provides a constant salary or wage. Self-employment includes sole owners, freelancers, and independent contractors.

How much is the self-employment tax?

Self-employment taxes are 15.3%. The self-employed pay 12.4% of their earnings for Social Security and 2.9% for Medicare. Remember that self-employment taxes are deductible. The Internal Revenue Service (IRS) will enable you to deduct half of your self-employment tax, which is generally covered by your employer.

What type of workspace qualifies as a home office?

The workstation must be utilized solely and frequently for business purposes. You cannot claim the home office deduction if the workplace is utilized for both professional and personal purposes. Just because your workstation is in your living room doesn’t imply you have exclusive use of the area, particularly if you utilize it for purposes other than business. It is critical to be precise in case you are audited.

The Bottom Line

It takes more than a computer to call your spare bedroom a home office. If you want to avoid a painful audit, you must first grasp the home office deduction laws and then use them appropriately to claim your deduction. More information on home office deductions may be obtained on the IRS website; just download IRS Form 8829 instructions.

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