Home Office Deduction: The Facts on Having a Home Office

If you have or are thinking of starting a home based business, there is a tax deduction that is available for you solely for the space that you operate in your home that is dedicated to a home office.

A Home Office Deduction Can Be Risky

There is a lot of talk about how this deduction can be a risky thing to use because of the chance of IRS audit. Maybe you have read that you need to see clients or customers at your home office or that you need a separate entrance. This and a lot of other things are completely untrue since the law changed back in 1997. There is a lot of bad information about what constitutes a home office and how the deduction works.

Two Tests To Keep In Mind

The truth is, home office deductions are completely legal. They are safe in nature and there is only two tests that you need to pass to be eligible to take such a deduction. These two tests are

1. The space needs to be used regularly for business purposes.

2. The space needs to be used exclusively for business purposes.

The office you use in your home must be used only for business purposes. There cannot be a bed, or other things that would occupy a normal bed room. It cannot contain games or things that would suggest lecture activities are being conducted in the room.

If you can picture what a typical office contains, this is exactly what your home office can contain and nothing else. Next the space must be used regularly but it does not need to be your only office. You can have another office in a real commercial building and still take the home office deduction.

The next step is to determine how you are going to deduct your home office on your tax return. Depending on the type of business structure you chose for your business will determine how you calculate the home office deduction.

Here is an easy list of each business structure:

Sole Proprietorship

Report on Form 8829. Limited to the amount of income on Schedule C. You cannot expense your home office into a loss. Any expense that is larger than your Schedule C income can carry forward into the next year.

Partnership

You can report the home office expenses on Schedule E along with K-1, or you may report them as part of rental expenses.

S Corporation

Report the expense as part of rental expense.


1. Calculate the square footage for the space that is dedicated only to business operations.

2. Calculate the total square footage of your home including the home office space.

3. Determine the business use percentage. (business square footage divided by total square footage)

4. Apply the business use percentage to total home costs such as rent or mortgage interest, property tax, homeowner’s due, maintenance, utilities and the like.

5. Remember to include expenses that are a part of your home office and to deduct them as well. This includes anything that is a direct expense in which you need to get your home office ready for work.

About Paul Gaulkin CPA

Paul Gaulkin is a Certified Public Accountant and enrolled with the U.S. Treasury to practice before the IRS. Mr. Gaulkin possesses unique technical knowledge in the process of securing relief for taxpayers nationwide with IRS and State tax problems. With an accounting degree from Florida International University, he is able to transform complex tax and accounting problems into easy to understand solutions.


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