Every year we get questions from clients regarding the home office deduction on their tax return. Today we will attempt to tackle some of these questions and provide clarity on a complex tax concept.
What is considered a home office? It is an area in your home that is used exclusively for business. You cannot claim your couch that you watch television on as a home office even if you do work there. It can be an entire room or a section of a room. For example: a desk, chair, computer, and printer in the corner of your bedroom will qualify as long as it is used strictly for business purposes.
What if you have a brick and mortar location? You can still claim a home office deduction but only if it is used regularly for administrative and management duties. What are administrative and management duties? Sending invoices, paying bills, ordering supplies, setting appointments, and keeping your books are examples of tasks that will allow you to take the home office deduction.
What are the deductible expenses related to your home office? If you are a home owner you may deduct mortgage interest, property taxes, and depreciation. Other expenses that can be deducted include: insurance, utilities, repairs, and rent.
What portion of the deductible expenses can you claim on your tax return? This can be calculated by dividing the total square footage of your home by the total square footage of your home office. For example: If you home was 2,000 square feet and your office was 100 square feet you would be able to deduct 5% (100 / 2,000) of mortgage interest, property taxes, depreciation, insurance, utilities, and repairs.
Where do you report the home office deduction on your tax return? Schedule C businesses will use Form 8829 while S-Corporations can reimburse their owner-employee through an accountable plan. If your Schedule C business was not profitable then the home office deduction is not allowed and is carried forward to offset future profits.