How to Deduct Your Home Office Expenses

Employees and self-employed taxpayers who are able to work from home can often take a deduction for their home office expenses. Here's how.

Difficulty: Moderate

Instructions

Things You'll Need:

• A list of all expenses incurred for your home office
• The total square footage of your residence
• The total square footage of your home office space

1. Regardless of whether you are an employee or an independent contractor, if you are fortunate enough to be able to work from home, then you will have a certain amount of expenses that are either deductible outright or at least eligible for deduction. But two sets of criteria must be met for self-employed taxpayers and the 2 percent adjusted gross income threshold must also be satisfied by W2 employees.

2. The first criteria that must be satisfied is whether your workspace is used exclusively and regularly for business. Both of these criteria must be met in this test before any deduction can be taken. If you use your workspace for both business and personal use, then it is not deductible. Furthermore, you must use the space on a regular basis for business purposes; a space that is used only a few times a year will not be considered a home office by the IRS, even if you only use the space for business purposes. These criteria will effectively disqualify you from claiming this deduction if you are unable to substantiate regular and exclusive home office use. However, it is not necessary to partition off your workspace in order to deduct it, although this may be helpful if you are audited. A desk in the corner of a room can qualify as a workspace, as long as you count only a reasonable amount of space around the desk when computing square footage.

3. If you run a daycare out of your home, the regular and exclusive use test is somewhat different. In this case, your home would regularly be used for daycare, but not exclusively, because obviously those receiving care are only there during the day. Therefore you will compute your home daycare expenses by apportioning out not only the square footage of the home versus the area used for daycare, but also the number of hours the area is used for daycare versus the number of hours in the year (8,760). Utility rooms such as laundry and storage rooms may be deductible under certain conditions as well.

4. The second major test that your home office must meet is whether your office is solely for your convenience or the convenience of your employer. If your employer has provided a place for you to do business at its own location, then you cannot simply set up a home office for your own convenience and deduct its expenses. Your employer essentially has to mandate that you must work from home before your expenses become deductible. There cannot be an alternative location available. Both employees and independent contractors may have to prove this to the IRS via expense receipts and documentation from their employers stating that there is no workplace provided to them outside their homes.

5. If you have more than one home-based business, then you must be careful when claiming the home office deduction, because if each of your different lines of business do not meet the above criteria, then you can't take a home office deduction for any of them. It’s an all-or-nothing proposition; your home office expenses for each separate line of business must meet the above criteria on a standalone basis, and if one line fails, then all others fail as well.

6. After you have satisfied all of the pertinent criteria, you must complete IRS form 8829 in order to compute the actual amount of deductible home office expenses. The first step in computing expenses is to determine the amount of square footage of the workplace and divide that by the total square footage of the home. For example, if your home office is a 15-foot by 15-foot room, and your home has a total of 1,600 square feet, then you will divide 225 by 1,600 to get 0.14. This decimal represents the percentage of your total residential expenses that can be allocated toward the home office deduction.

7. List all of the expenses that pertain to your entire home, such as rent or mortgage interest, real estate taxes, insurance, utilities and depreciation for the year under the section titled “indirect expenses” of form 8829. Expenses that are incurred solely for the benefit of the office space are then listed under the “direct expense” section of the form. The indirect expenses are totaled and multiplied by the percentage derived earlier, while the direct expenses are also totaled and added to the indirect expenses. A final test that must be met here is the income test, which mandates that the total deductible expenses cannot exceed the income derived from the business for which the deductions have been taken. For example, if total deductions come to $1,200 and only $950 of income has been earned from the business, then only $950 of deductions can be taken for that year. However, the remainder can be carried forward to a future year and deducted when business income exceeds expenses.

8. After all computations have been made, you must carry the final number to either the Schedule C if you are self-employed or form 2106 and then to Schedule A if you are an employee. If you fall into the latter group, you must first be able to itemize deductions before you can be eligible to deduct any home office expenses. Then your deductions are aggregated with all other unreimbursed employee expenses and must exceed a 2 percent AGI threshold before you can take any actual deduction.

Tips & Warnings

• For more information on home office deductions, visit irs.gov (see link below) and download the instructions for IRS Form 8829.
• This article is intended as a general guide and should not be construed as specific tax advice. Readers that have further questions on this subject should consult their tax advisor.

Resources

• Internal Revenue Service

[Inkling]

on 8/8/2008 Thanks for the list of expenses!