If you are self-employed, or own a business then you may qualify to take the home office deduction. Although people often say it is an audit red flag, there are actually millions of Americans who claim the home office deduction each year without running into any trouble with the IRS. Just make sure you meet the following requirements, are honest about your expenses, and you can benefit from the home office deduction without any IRS problems.
Designated Room or Space
In order to qualify as a home office – in the eyes of the IRS – you need to have a separate room or designated space that is used exclusively for business purposes. If it is not a room, then the space needs to be separated by a room divider of some sort. Additionally, the IRS is very strict about the exclusive use rule, so if your children play in the office or your spouse uses the room as a home gym then it will not qualify.
Principal Place of Business
According to the IRS, your office must either be the principal location of that business, or a space where you meet with clients regularly. If you work exclusively from home then you can easily prove that the office is your principal place of business. However, if you have another office away from home, you will need to show that you regularly meet with clients from your home office.
Calculating the Deduction
In calculating your home office deduction you need to know both the total square footage of both your home and your designated home office. This is because your home office deduction will be based off of the percentage of your house used for business. For example, if your home is 1500 square feet and your office is 150 square feet then your deduction would be calculated using 10%. Meaning, you can deduct 10% of your rent and indirect expenses.
Direct and Indirect Expenses
In addition to deducting a percent of your rent or mortgage, you can also benefit from direct and indirect business expenses. Any money spent to repair or maintain your home office is fully deductible. For example, if you paint your office or buy new office furniture then you can deduct the associated costs.
Indirect expenses related to doing business from your home office can also make for valuable deductions. If your office is around 15% of your home’s total square footage then you can deduct that percentage of your yearly utility bills, homeowners insurance, security, home owners association fees, etc.