Home Office Deduction
One of the most overlooked and contentious deductions for many taxpayers is the home office deduction. The deduction is overlooked because many taxpayers are unaware that the deduction exists and contentious in that it has been abused by many taxpayers over the years by not knowing the requirements.
Requirements
There are four basic requirements in order to take the home office deduction:
- The office in your home must be used regularly and exclusively for business and or to meet with customers and clients.
- You may not have another office location in which you perform the majority of your work. The home office must be the main office in which you perform the duties of your job.
- If no other location is available to perform administrative or managerial tasks you may perform those tasks at your home office and claim the deduction
- You must have an office or room in your home that is used exclusively for business. It cannot be a room in which the predominant use is personal
What is deductible?
You can deduct various expenses for your home office. The expenses are either direct expenses or indirect expenses. Direct expenses are deducted at 100% and are allocated completely to the home office. The expenses would include repairs, painting, furniture, equipment, phone, and internet that are directly allocated and applicable to the home office. Indirect expenses are expenses that are for the entire home in which a portion of the expenses are to be allocated to the home office. These expenses include but are not limited to the following:
- Mortgage interest
- Property taxes
- Homeowners insurance
- Utilities
- Repairs
- Home Association dues
- Pest Control
How deduction is calculated
For indirect expenses the home office deduction is calculated by dividing the square footage of the home office by the square footage of the home and multiplying that ratio by the common home expenses mentioned above. This is the most common method used. Another method that is used is the amount of hours used in the home office compared to the rest of the home. This method is used mostly for daycare facilities.
New Safe Harbor Method
For tax year 2013 a new safe harbor method was created to simplify and provide streamlined substantiation requirements. This new method states that a taxpayer can claim a home office deduction by multiplying $5.00 p/sq foot by the total square footage of the office up to 300 square feet. Thus the maximum home office deduction based on this method would be $1,500 ($5.00 x 300 sf). The taxpayer must still qualify to take the home office deduction by fulfilling the requirements. With this new method you will no longer have to substantiate any expenses through receipts or other records. This new method will most likely taxpayers who have a small home office and have very little home expenses. Taxpayers who have a large home office and have significant home expenses will probably receive a larger home deduction by using actual expenses.