IRS reminds taxpayers of the home office deduction rules
WASHINGTON — the Internal Revenue Service wants individuals to consider taking the home office deduction if they qualify. The benefit may allow taxpayers working from home to deduct certain expenses on their tax return.
The home office deduction is available to qualifying self-employed taxpayers, independent contractors and those working in the gig economy. However, the Tax Cuts and Jobs Act suspended the business use of home deduction from 2018 through2025 for employees. Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home.
Qualifying for a deduction
There are two basic requirements to qualify for the deduction. The taxpayer needs to use a portion of the home exclusively for conducting business on a regular basis and the home must be the taxpayer's principal place of business.
To claim the deduction, a taxpayer must use part of their home for one of the following:
Exclusively and regularly as a place where patients, clients or customers are met in the normal course of a trade or business
As a separate structure that's not attached to a home that is used exclusively and regularly in connection with a trade or business
On a regular basis for storage of inventory or product samples used in a trade or business of selling products at retail or wholesale
For rental use
As a daycare facility
The term "home" for purposes of this deduction:
Includes a house, apartment, condominium, mobile home, boat or similar property Includes structures on the property, like an unattached garage, studio, barn or greenhouse
Doesn't include any part of the taxpayer's property used exclusively as a hotel, motel, inn or similar business
Qualified expenses
Deductible expenses for business use of home normally include the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs. In general, a taxpayer may not deduct expenses for the parts of their home not used for business; for example, expenses for lawn care or painting a room not used for business.
Claiming the deduction
A taxpayer can use either the regular or simplified method to figure the home office deduction.
Using the regular method, qualifying taxpayers compute the business use of home deduction by dividing expenses of operating the home between personal and business use. Self-employed taxpayers filing IRS Schedule C, Profit or Loss from Business (Sole Proprietorship) first figure this deduction on Form 8829, Expenses for Business Use of Your Home.
Using the Simplified Option, qualifying taxpayers use a prescribed rate of $5 per square foot of the portion of the home used for business (up to a maximum of 300 square feet) to figure the business use of home deduction. A taxpayer claims the deduction directly on IRS Schedule C. Revenue Procedure 2013-13PDF provides complete details of this safe harbor method.
Daycare facilities
Taxpayers who use their home on a regular basis for providing daycare may be able to claim a deduction for part of the home even if it is used as the same space for nonbusiness purposes. To qualify, both of the following requirements must be met:
The business must provide daycare for children, people age 65 or older, or people who are physically or mentally unable to care for themselves.
The business must have applied for, been granted, or be exempt from having a license, certification, registration, or approval as a daycare center or as a family or group daycare home under state law.
Additional resources
Publication 587, Business Use of Home (Including Use by Daycare Providers) Form 8829, Expenses for Business Use of Your Home
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Edited Clip source: IRS reminds taxpayers of the home office deduction rules during Small Business Week | Internal Revenue Service
How a Small Apartment Can Qualify for Home Office Deduction
How you arrange and use space is key to qualifying for the home office deduction, particularly in a small living space.
By Stephen Fishman, J.D.
If you're in business for yourself, the home office deduction can be one of your largest tax deductions. This is particularly likely to be true if you're a renter because it allows you to deduct a portion of the rent you pay for your apartment or home, an expense that is ordinarily not deductible at all.
For renters who live in high-cost areas like New York City or San Francisco, the home office deduction can be substantial. In one recent case, a public relations professional who worked out of a home office in her Manhattan studio apartment was entitled to an annual home office deduction of $9,293.
However, there are some restrictions on taking the home office deductions that can make it difficult for people who live and work in small apartments to qualify for it. You can't take the home office deduction unless you use part of your apartment or home exclusively for your business. In other words, you must use your home office only for your business. (However, this requirement doesn't apply if you store inventory at home or run a home day care center).
If you use part of your home—such as a room or studio—as your business office, but you also regularly use that same space for personal purposes, you won't qualify for the home office deduction.
The easiest way to meet the exclusive use test is to devote an entire room in your home to your business—for example, by using a spare bedroom as your office. However, not everybody has an extra room to spare—and the IRS recognizes this. You can still claim the deduction even if you use just part of a room as your office, as long as you use that part exclusively for business.
However, as a practical matter, people who live in very small apartments can have a hard time convincing the IRS or tax court that they use part of their space only for business. One taxpayer, a psychologist who lived in San Francisco, claimed a home office deduction for one-quarter of her apartment. The entire apartment was a 400-square-foot studio, consisting of an open area (approximately 13 feet by 15 feet) furnished with a desk and a couch and a small dining area and kitchen (each approximately seven feet by eight feet). The area of the apartment this taxpayer said she used exclusively for business purposes was also the main passageway through the apartment. Given the layout of this tiny apartment, neither the IRS or tax court believed her claim that she used 100 square feet exclusively for her psychology business and she was not allowed to take the deduction. (Mullin v. Comm'r, TC Memo 2001-121.)
On the other hand, another taxpayer, with a 700 square foot studio apartment in Manhattan, did qualify for the home office deduction. She was a public relations professional and divided her apartment into three equal sections: (1) an entryway, a bathroom, and a kitchen area; (2) an office space, including a desk, two shelving units, a bookcase, and a sofa; and (3) a bedroom area including a platform bed and dressers. She admitted that she had to pass through the office space to get to the bedroom area. Nevertheless, the tax court found that the office area of her apartment satisfied the exclusivity requirement for the home office deduction. It held that "her personal use of the space was de minimis and wholly attributable to the practicalities of living in a studio apartment of such modest dimensions." (Miller v. Comm'r, T.C. Summary Opinion 2014-74.)
Conclusion:
If you use the same room (or rooms) for your office and for other purposes, you should arrange your furniture and belongings so that a portion of the room is devoted exclusively to your business. Place only business furniture and other business items in the office portion of the room. Business furniture includes anything that you use for your business, such as standard office furniture like a desk or chair. Depending on your business, it could include other items as well - for example, a psychologist might need a couch or an artist might need work tables and easels, and a consultant might need a seating area for clients. One court held that a financial planner was entitled to have a television in his home office because he used it to keep up on financial news. Be careful what you put in this space, however. In another case, the IRS disallowed the deduction for a doctor because he had a television in the part of his living room that he claimed as his home office. The court wouldn't buy the doctor's claim that he only watched medical programs.
Edited Clip source: How a Small Apartment Can Qualify for Home Office Deduction | Nolo
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