Tax Season: Demystifying the Home Office Deduction
It's the sexiest and scariest of deductions, and it's often shrouded in mystery. It's the home office deduction, and rumors abound about who qualifies, how it's calculated and whether taking it automatically flags an IRS audit.
Unlike more obvious deductions, many people aren't sure if they qualify to take the home office deduction. But with the large number of American small businesses based out of an owner's home -- including more than half of all small businesses, according to the Small Business Administration -- those who qualify shouldn't hesitate to claim the home office deduction.
According to the IRS, a portion of your house might be considered a legitimate home office if it meets a few requirements: It's your primary workplace (i.e., you don't have a separate office space that you are required to attend from 9 to 5 every day); it's used exclusively for work; you regularly meet with clients there; and/or you have a place such as a garage that you use to store work-related supplies.
Jeff Porter, certified public accountant and principle of Porter & Associates in West Virginia, says some people simply shouldn't take the deduction. "If you're someone who has an office that you go to every day, and maybe you bring work or files home, or you check emails after hours, this isn't really a home office," Porter says. "The exception would be if, for instance, you work at your regular office four days a week, and on Fridays you work from home, and have client meetings there. Then it would count."
As with anything concerning the IRS, the home office deduction has some nuances, and they're outlined in Publication 587.
Doing the Math
There are two types of expenses that go into calculating the home office deduction: prorated and dedicated. Prorated expenses are ones for your overall home where a portion is claimed, such as a mortgage or rent, utilities and Internet. Dedicated expenses include items bought exclusively for the home office, such as furniture or new paint.
%VIRTUAL-pullquote-The simplified option is just that -- an option, and it can be more convenient to take it than to calculate all your expenses over the course of the year.%Recognizing that calculating the percentage of a mortgage and other expenses by the square footage of a home office can be a trial, the IRS instituted in 2013 what it calls the "simplified option" for calculating the home office deduction in 2013.
"What the simplified method says is that you can claim $5 a square foot, up to a maximum of 300 square feet, so you have a maximum $1,500 deduction and you don't have to go through keeping track of all your utilities and various expenses," Porter says. "But the important thing is the criteria is the same. You still have to qualify under the regular rules, but the calculation is easier."
"The simplified option is just that -- an option, and it can be more convenient to take it than to calculate all your expenses over the course of the year," says Don Zidik, a CPA in Needham, Massachusetts. "It's a more common-sense way of calculating."
Porter recommends using both methods of calculation each year to get a sense of which one is the better choice for filing. One thing to keep in mind is opting for the simple versus itemized deduction could have implications on depreciation should you sell your home, which is something you may want to factor in for long-term planning.
An Automatic Flag?
Unlike deductions for dependent children, the home office deduction has a bit of a reputation as the wild child of deductions. Rumors abound that taking it will automatically flag an audit.
Porter says he's heard that worry from some of his clients. But the truth is, the home office deduction is no more or less likely than any other aspect of your return to flag an audit.
"From time to time, if the return itself has reasons for an audit, then the home office might be something the IRS looks at," Porter says, "but I've never seen an audit for the sole purpose of an office in the home."
Part of the reason it's not an automatic flag is that the maximum amount, $1,500, is relatively small in the grand scheme of things. After all, if people are going to attempt to defraud the IRS on their tax return, they're more likely to go bigger than a mere home office deduction.
For more information about the home office deduction, see IRS Form 8829: Expenses for Business Use of Your Home and the SBA blog. The IRS also has a YouTube video on the simplified home office deduction.