Due to the COVID-19 pandemic, many non-essential businesses had to close their offices and shift operations to working from home scenarios. This means that many homes became de facto offices and, as such, can be considered an expense. In this article, we will discuss how to make a tax deduction from the expenses of working at home.
What is the Internal Revenue Services (I.R.S.) Definition of a Home Office?
According to the I.R.S., for a home office to qualify for a tax deduction, it must meet two requirements:
- Regular and exclusive use
- Principal place of your business
In practice, this means that bringing your work laptop home to respond to emails or participate in zoom meetings from the dining room table is not sufficient. The home office needs to be a space where clients or customers can come into, and the owner does not use it for anything else, such as a guest bedroom.
Can a Home Office be an Additional Office?
If a person has a primary place of business, such as a storefront, but also uses part of their home exclusively for their business, then they might be able to deduct the home office expense. For example, suppose a person owns a clothing store, but uses their home garage exclusively to store fabric, extra clothing, and/or design new outfits. In that case, the garage might be a home office for working from home and may qualify as an expense deduction.
How to Calculate a Home Office Deduction
There are two methods to determine a home office deduction. Those methods are as follows:
A business owner can find the actual-expense method calculation in I.R.S. Form 8829, “Expenses for Business Use of Your Home.” The form will help the business owner determine the direct and indirect expenses for their home office. The benefit of the actual-expense method is that it allows for greater tax deductions than the simplified method. The disadvantage of the actual-expense method is that it requires accurate record-keeping and may trigger an audit and other liabilities.
What are Direct Expenses?
Direct expenses are equipment purchased and used solely for the business. Examples of direct expenses are a computer and printer that the owner uses exclusively for business purposes. Direct expenses are fully deductible.
What are Indirect Expenses?
Indirect expenses are expenses shared with the home. Examples of indirect expenses are electric bills, insurance, utilities, etc. These are expenses applied to the home structure, and therefore the business side needs to be proportioned out. Indirect expenses are figured out by the proportion of space used by the home office. For example, if the rent on the home is $1,000 a month and the home office space is 25% of the home, then a person would be able to deduct $250 a month as an indirect expense for office rent.
According to I.R.S. Rev. Proc. 2013-13, a person can deduct up to 300 square feet of their home for a home office at $5 a square foot. If a person elects the simplified-method of calculation, they lock into it for at least one tax year. The benefit of the simplified-method is that it is not likely to trigger an audit or any liability issues.
Seek Professional Counsel
If you believe that part of your home may qualify as a home office, contact Dowd Law for a consultation. We will review the usage of your property and help you determine whether you meet the qualifications needed under the law to receive a home office deduction.