This article is accurate for returns filed through tax year 2017. Under the Tax Cuts and Jobs Act, some of the laws mentioned changed beginning in 2018. Learn more about the updated tax laws enacted under the Tax Cuts and Jobs Act here.
Do you qualify?
Whether you own a home or rent, you may be able to take a home office deduction. To claim a home office deduction, according to the IRS, you must meet three requirements.
1. Regular use
If, for example, you use your basement as your home office, and you work in your basement regularly, then you meet the “regular use” criterium. If you use your basement as your home office “occasionally,” however, you can’t deduct home office expenses.
2. Exclusive use
Your designated workspace must be used only to conduct business. For example, your basement, which you use as your home office, can’t be used for anything else, at any time—such as a playroom or man cave. Using your office solely for your business and nothing else is called “exclusive use.”
3. Primary place of business
Your home office must be where you conduct the majority of your business. That is, it must be the main area where you interact with your clients, perform transactions, or complete managerial or administrative tasks.
Your home office can exist as a separate structure on your property, too—like a shed.
Home office deductions: Two methods
Once you’ve determined that your home office is used regularly and exclusively for your business and that it is indeed primarily where you operate your business, you’ll choose one of two methods for deducting your home office expenses.
1. Regular method
The regular method is based on the percentage of your home that is regularly and exclusively used for your business. Using this method, all expenses must be listed.
- Determine what expenses are personal and what expenses are related to your business.
- Categorize your business expenses into direct, indirect (tip: use Form 8829 to help classify direct and indirect expenses) and unrelated.
- Calculate the percentage of your home used to operate your business.
2. Optional method
The optional method is a simplified method, allowing you to take a standard deduction.
- Take a standard deduction of $5 per square foot (max: 300 square feet) of the area used for business.
- Subtract the business expenses not related to the use of the home from the gross income related to the business use of the home. You can’t take a home office deduction if the expenses are more than the gross income from the business use of the home.
- Determine which is smaller—the amount from item (a) or (b) above—and deduct that amount.
If you know the criteria, if you ensure your numbers are accurate, and if you keep good records, home office deductions should be easy. For detailed guidance, refer to the most recent version of IRS Publication 587 “Business Use of Your Home (Including Use by Daycare Providers).”
Are you ready to slay your taxes?