As a general rule, the expense of owning and operating your home is not a deductible personal expense. However, if you use portion of the home for business, you may be able to deduct certain expenses. You can claim the deduction by using your actual expenses or an allowance according to IRS’ simplified method. this deduction is allowed for self employed individuals and also employees who meet certain requirements.
• You have to meet one of the three requirements in order to claim that deduction. The home (or garage if you do mechanical work or greenhouse if you grow plants for sale), must be your principal place of business. This place must be where you meet your clients in a regular course of business. Or it has to be a separate structure used in connection with your business.
• (Example – if you have an regular office but still meet your clients in evenings or weekends at your home office, and that space is exclusively used for that purpose, you can deduct home office expenses)
• There are some exceptions to the exclusive use requirement and it applies to day-care facilities and storage of inventory but not to bed and breakfasts.
• You can use actual expenses or a Safe Harbor Amount and the method can be changed on annual basis. Using one over the other can create greater expenses in certain situations.
• If you use actual expense method you can deduct among others: mortgage interest, depreciation, rent, utilities, real estate taxes, insurance, security systems, cleaning, ect.
• Use square footage to determine the percent of your actual expense. For example, if you have a 2,000 square foot home and your office is 15 x 10 feet, or 150 square foot, then your office use is 7.5% (150 divided by 2,000).
• Based on Safe Harbor Amount, you can deduct up to $5 per square foot for up to 300 square feet for a maximum deduction of $1,500.
• If you are using a mobile office such as an RV or mobile home, these rules are more complex.
• If you claim your deduction of the home office, it will not affect your claim to home sale exclusion ($250,000 for individual and up to $500,000 for joint return) if you qualify. But remember that there are 25% depreciation recapture rules applicable.
The rules are complex, but a basic understanding of the rules and good record-keeping will help you get the best tax breaks from your home office. Give us a call if you would like more information.
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