Updated: Nov 15, 2019
By Daniel Goodwin
We have seen a monumental shift to more and more individuals who are freelancers, consultants, or starting some type of home office business over the past five years. The home office deduction has often been branded as the dreaded ‘red flag’ that will surely cause you an audit. When you file your taxes, the IRS has offered you a simplified version of the home office deduction so you don’t have to break out your spreadsheets and start doing a set of massive math calculations.
The optional deduction is $5 for each square foot of home office space up to a maximum of 300 square feet. Instead of filling out the usual 8829 form, you’ll use a new worksheet in the Schedule C instruction book and enter your simplified home office deduction in Schedule C. Of course, the regular rules around home office deductions will still apply, but here is some guidance the IRS has provided taxpayers.
Whether you are self-employed or an employee, if you use a portion of your home for business, you may be able to take a home office deduction.
Here are six things the IRS wants you to know about the Home Office deduction
1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:
As your principal place of business, or as a place to meet or deal with patients, clients or customers in the normal course of your business, or in any connection with your trade or business where the business portion of your home is a separate structure
Not attached to your home.
2. For certain storage use, rental use, or daycare-facility use, you are required to use the property regularly but not exclusively.
3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.
4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.
5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on line 30 of Form 1040 Schedule C, Profit or Loss From Business. (Remember, I just discussed the simplified option.)
6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.
The important point to note here is that if your employer provides you a desk or a place to work out of at all, you simply cannot claim a home office deduction even if you work out of home more than you do in the office space that is dedicated for you by your employer. Your home office also has to be a separate and distinct space. It can’t be a room that is part playroom for the kids and part office in the corner. In fact, publication 587 specifically gives an example. You are an attorney and use a den in your home to write legal briefs and prepare clients’ tax returns. Your family also uses the den for recreation. The den is not used exclusively in your trade or business, so you cannot claim a deduction for the business use of the den. This should be a good example for most of you wondering what kind of room would qualify in your house.
With this simplified home office deduction, it will now give each taxpayer a choice on how to deal with this write-off issue. Avoiding taking a legitimate tax deduction is simply poor tax management planning and just plain old silly if you really qualify to take the write off. The only red flag you have at the end of the day is the one you stick in the ground. No, the movie room/home office won’t likely qualify. No, the recreation kids’ room/home office won’t likely qualify. No, the new kitchen you put in/home office likely won’t qualify. Tax deductions like these can often come down to common sense and most of us know the difference. Make sure your home office really is a home office and it could be the best smart money move you make when you file your taxes.
If you are really uncertain about square footage, just use the simplified home office deduction.