Do You Qualify for a Home Office Deduction?
For business owners, contractors, and self-employed individuals, the possibility of a home office deduction can be quite appealing. However, taking that deduction can be quite a bit more complicated than you might imagine. This deduction is one of the most commonly abused deductions on tax returns, and therefore, is one of the most commonly audited. So, it’s important that you only claim a home office deduction if you truly qualify for one. But how do you know if you qualify? And how do you calculate that deduction? Keep reading to find out.
Exclusively and Regularly Used for Business
This is the primary qualification for a home office deduction—and the one that people tend to “bend” when they claim a home office deduction incorrectly. To be eligible for a home office deduction, you must use a portion of your home exclusively and regularly for business. This means that a room in your home (or possibly a separate structure on your property) must be dedicated solely to your work. If the room or structure is used for any other purpose, even if it’s just once a week, you cannot take a home office deduction. Here’s an example:
You have an office in your home. This room has your desk, computer, files, and other essential equipment for business use. You work in this room every day for several hours a day. If this is the only way in which the room is used, then you qualify for a home office deduction.
However, if that desk and computer are also used for the family to play PC games or for your kids to do homework, the room is no longer used exclusively for business purposes. Therefore, you cannot take a home office deduction. Similarly, if you have a computer and desk set up in your bedroom, you cannot take a deduction because the room is used for another purpose.
It’s also important to note that the space must be used regularly for work. If you work at a business location or separate office almost exclusively, and only use your home office a few times a year, this does not qualify you for a deduction.
Facing an Audit for a Home Office Deduction
As we’ve already mentioned, home office deductions are a red flag to the IRS, and taking one greatly increases your chances of being audited. If you are audited for your home office, you will need to provide evidence that you meet the qualifications mentioned above. Note that audits typically take place over the phone or by mail, so you’ll need to provide supporting documentation for your home office deduction.
First, be sure to let your tax preparer know that you’re being audited. If you’re working with a CPA, they can not only assist you with preparing your documents, but can actually represent you during the audit. To prepare for your audit, you need to ensure that you have no personal items in your home office. Certain things will stand out as a red flag to an auditor: Obvious ones would include other furniture in the space, such as another person’s desk, a bed, or a toy box. Television sets and stereos also show that more than just work is going on there. Even items you might normally have in an office, such as books or personal effects, can be a red flag. Make sure you don’t have any of these items in your office, and include a few photos of your office setup to show that it is exclusively designed for work use.
Calculating Your Deduction
If you are confident you qualify for a home office deduction, there are two ways you can calculate it. The first is the simple method: Multiply this year’s deduction amount ($5 for 2020) by your home office’s size in square feet, up to 300 square feet. So, for 2020, the maximum home office deduction would be $1,500.
The second method is more difficult, but it can often provide a higher deduction. For the standard deduction, you’ll need to calculate what percentage of your home you actually use for your business. So, divide the number of square feet of your office space by your house’s total square footage, then multiply by 100. As an example, if you have a 3,000-square-foot home and your office is 300 square feet, you use 10% of your home for business purposes. This allows you to deduct 10% of the following types of home expenses:
- Home insurance
- Home repairs and maintenance
You can also deduct expenses solely related to your business, including:
- Repairs exclusively made to the office
- Furniture for your home office
- Supplies and materials
- Equipment (printers, computers, etc.)
Taking a home office deduction is complex, and we don’t recommend that you try to calculate it alone. Work with one of our qualified CPAs to ensure you claim this deduction correctly, and so that you’ll have an expert on your side if you’re audited. Call to schedule a consultation today.