Tax Returns Tax Deductions: Using Part of Your Home for Business

With a growing frequency, taxpayers not only live, sleep and eat with their families in their home but they also work there too. Whether you spend a couple of hours a week at home for work or it's a full time engagement, you should know whether you have the ability to file a tax deduction for a home office.

Common reasons why people choose to work from home include reducing overhead on office costs and also the ease of spending more time with their family rather than commuting. There are several federal tax benefits which may also apply, such as when a taxpayer takes a tax deduction for using part of his or her home for business. It is important to fully understand the tax rule for this tax deduction as there are a number of limitations and restrictions which apply.

What qualifies as a tax deduction for a home office?


When you take a tax deduction on your taxes for using a part of your home for your business, it is sometimes referred to as a 'home office' deduction. The requirements under tax law for those who work for others and those who work for themselves are different although the main requirement is the same. That requirement for a 'home office' tax deduction is that the part of the home being deducted must be used exclusively for business purposes or trade on a regular basis. It may not be used for personal reasons.

For tax purposes, the manner in which the space is used over an entire day determines the "exclusiveness" of use. For example, if you have a home office which you use from 9-5 during the working week but which your children use to play in at the weekends, it will not be said to be used exclusively for your business.

Who qualifies for a tax deduction for a home office?


In order to qualify for this tax deduction, you must be using a part of your home on a regular basis and exclusively for business purposes, including it being:
  • the main place you perform business or trade if you are self employed
  • the place you would meet with clients, patients or customers during the course of your business or trade
  • in relation to your business or trade if you have a separate business premises which isn't connected to your home

In addition to the above, employees can only take this tax deduction if:
  • the business use is convenient to the employer
  • the employee is not renting any part of the home to the employer and using that part of the home to carry out services for the employer as an employee
For example, teachers are not required to work from home grading assignments since they have a classroom to carry out these duties which is provided by the school. If a teacher wanted to grade student papers from home in their own home office, they could not apply a home office tax deduction. Grading papers from a "home office" is not a benefit or convenience to the school, which did not require the teacher to work from home.

The home office tax deduction may be taken by home owners if they are using free standing structures on their property, such as garage expenses, for self employed people who store their supplies in their garage. The expenses associated with the garage could be depreciation or maintenance.

What is the tax deduction for a home office in an apartment?


The same tax rules apply to those who live in apartments and who use a part of their apartment for business purposes. The tax code makes no differentiation between houses and apartments.

How much is the tax deduction for a home office?


You can normally deduct a portion of your utility bills from your taxes in proportion to the square footage of the space which you are using. Other expenses, such as cell phone bills which are entirely used for the business, should qualify for a full tax deduction. By way of example, if your entire home consisted of 2,000 square feet and the space that you are using for your business measures 200 square feet, then you are allowed to deduct 10% from your complete house expenses. If your annual heating bill was $1,500, then you should qualify for a deduction of 10% of that amount for your office space which would be $150.

Other potentially tax deductible expenses may include:
  • Mortgage interest
  • Rent and depreciation
  • Real estate taxes

What are the limits to home office tax deductions?


There are three categories which expenses fall into for the purposes of home office tax deduction:
  • Expenses which are directly related to your business or trade such as redecoration of your home office
  • Itemized expenses such as real estate taxes or mortgage interest
  • Depreciation which is related only to the portion of the house used for the business
For tax purposes, the direct expenses of the business can be deducted from the gross income of the business or trade. After deducting direct expenses, itemized deductions can further reduce income and, if a balance remains, depreciation may be applied.

Using an example, you may be using 10% of your home to run your home office. The gross income of your business is $15,000. Direct business expenses amount to $10,000. Real estate taxes and mortgage interest add up to $4,500. The total for depreciation on business use of the home comes to $1,000. After performing the math, you will only be entitled to deduct $500 for depreciation. ($15,000 - $10,000 - $4,500 - $500 = 0)

How is the tax deduction taken?


Self employed people who usually file IRS Form 1040 along with Schedule C should also attach a completed IRS Form 8829. Employees would file IRS Form 1040 and include their itemized tax deductions on Schedule A on their income taxes.
About author
Michael Wechsler
Michael M. Wechsler is an experienced attorney, founder of TheLaw.com, A. Research Scholar at Columbia Business School and of-counsel to Kaplan, Williams & Graffeo, LLC. He was also an SVP and chief Internet strategist at Zedge.net and legal consultant at Kroll Ontrack, a leading service e-discovery and computer forensics service provider.

Comments

There are no comments to display.

Article information

Author
Michael Wechsler
Article read time
4 min read
Views
2,486
Last update

More in Tax Law

More from Michael Wechsler

Share this article

Back
Top