The home office deduction is an important tax break associated with self-employment. But not all home offices qualify. And many self-employed individuals don’t know which expenses they’re allowed to write off — and which ones might raise red flags.
Your home office needs to meet three conditions to qualify for the deduction. It must:
1. Be used regularly for business. The IRS doesn’t provide a clear definition of “regular use” but says that business use must be more than incidental or occasional and that the facts and circumstances must be considered.
2. Be used exclusively for business. The space must be used only for business — not also as a guest room or for household storage or even as an area to pay personal bills. If you use a room for multiple purposes but use the desk in the corner exclusively for business, you can claim the desk’s space as long as it meets the other two conditions. You may, however, be able to deduct expenses for space used regularly but not exclusively for business storage.
3. Be your principal place of business. If you also conduct business elsewhere, your home office generally must be where you perform administrative tasks such as bookkeeping. It’s also considered “principal” if you regularly meet clients there or it’s a separate structure.
Keep in mind that special rules apply to certain businesses, such as day-care services.
If your home office meets the three conditions, you can deduct expenses such as mortgage interest and real estate taxes or rent, insurance, and utilities based on the percentage of your home used for business. You may also be eligible for a depreciation deduction.
You may be able to write off equipment such as phones, computers and the services that support them, but be careful. If, for example, you use your laptop for business but your spouse also regularly checks personal e-mail on it, you can claim only the percentage of time the computer and Internet service are used for work.
Although you don’t want to pass up possible deductions, it’s better to be safe than sorry. Keep detailed records and copies of all bills and receipts related to your home office, and avoid claiming more in home office expenses than actual business income. That’s an IRS red flag. To learn more about home office deduction dos and don’ts, please contact Holbrook & Manter, CPAs.