Lots of Ifs for Office Tax Deduction
One of the questions home office owners ask as they prepare their taxes is, “Can I take a deduction for a home office?”
The words regularly and exclusively are key to whether a home office qualifies for the deduction, said Sally Ruhnau, public affairs specialist at the Internal Revenue Service’s Laguna Niguel District.
“The area of the house designated as a home office needs to be used regularly and exclusively for business,” she said.
“For example, if your home office is incorporated into a room where you also have a TV, the minute you watch the TV for entertainment, the room then is also being used for personal use. The area is then disqualified because it’s not being used exclusively for business.”
If your home office occupies a section of a room such as a bedroom or living room, the office area needs to be closed off with a partition or screen.
“If you can look up from your office area and see the TV, for example, the space does not qualify,” Ruhnau said.
If your home office passes that first hurdle, to qualify for the deduction it must then meet one of three rules:
The office is the principal place of business for your trade or business.
It is a place where you meet or deal with patients, clients or customers in the normal course of your business.
It is a separate structure not attached to your house or residence.
If you are an employee and have a home office, the office has to be for the convenience of your employer, not for your convenience, to qualify for the deduction, Ruhnau added.
If you have an office at your employer’s business, but work out of a home office because you do not want a two-hour commute, you do not qualify for the home office deduction, she said.
If the room meets these requirements, there are direct and indirect expenses that can be deducted. (As always, keep records of all expenses.)
To figure deductions for the business use of your home, determine the percentage of your home used for business. Divide the number of square feet of your home office space by the total number of square feet in the home. Do not determine the home office percentage by the number of rooms in the home, Ruhnau warned.
Among the possible deductions:
The cost of painting or repairs to the office may qualify. If you are painting the office, you can deduct 100% of the cost. If you are painting the outside of the house, you can deduct the business percentage. Landscaping and mowing the lawn do not qualify, Ruhnau added.
The depreciation of the market value of the house can be deducted, using the home office business percentage, she said.
Real estate taxes on the home, insurance and deductible mortgage interest can be deducted, using the home business percentage, Ruhnau said.
Other expenses associated with a home office--such as the monthly operating costs, including utilities and services (electricity, gas, trash removal and cleaning services)--can also be deducted.
A home office deduction will more than likely increase your chances of being audited.
“There is no specific home office deduction flag,” Ruhnau said. “However, items on the income tax return are scored, with the home office deduction picking up some high points. If there are other high-scoring items on the return, such as the expenses often found with home businesses, your chances of being audited increase.”
For more detailed information on the home office deduction, refer to IRS Publication 587, “Business Use of Your Home.”
