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In my many years of practice this has been one of the most difficult tax deductions to explain to my tax clients, and to test for meeting all of the requirements for this tax deduction. If you search the Internet or talk with tax preparers, it’s one of the IRS “Red Flag” areas that is guaranteed to be scrutinized carefully when your filed tax return is evaluated and reviewed. The IRS guidelines and requirements are very specific:
2006IRSpolicyforbusinessuseofthehome.doc (live.com)
If your tax return is examined, you’ll receive several, specific questions and you will be asked to fulfill certain criteria to first determine if you meet these requirements.
Next, how are these business expenses determined and calculated? There are two options that are available to you:
1. You can use the “IRS Simplified Method” – # of square feet used for business x $5.00 per square foot, or
2. IRS Form 8829 “Expenses For The Business Use of Your Home” – 2021 Form 8829 (irs.gov)
a. The business expenses from Form 8829 will be reported on Schedule C of your tax return – “Profit and Loss From Business”
b. The remaining non-business expenses are reported on Schedule A (“Itemized Deductions”)
Be sure to test your tax return software for accuracy and mathematical accuracy!
Issue Number: Tax Tip 2022-10
How Small Business Owners Can Deduct Their Home Office From Their Taxes
The home office deduction allows qualified taxpayers to deduct certain home expenses when they file taxes. To claim the home office deduction on their 2021 tax return, taxpayers generally must exclusively and regularly use part of their home or a separate structure on their property as their primary place of business.
Here are some details about this deduction to help taxpayers determine if they can claim it:
- Employees are not eligible to claim the home office deduction.
- The home office deduction, calculated on Form 8829, is available to both homeowners and renters.
- There are certain expenses taxpayers can deduct. These may include mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent.
- Taxpayers must meet specific requirements to claim home expenses as a deduction. Even then, the deductible amount of these types of expenses may be limited.
- The term “home” for purposes of this deduction:
- Includes a house, apartment, condominium, mobile home, boat or similar property.
- Also includes structures on the property. These are places like an unattached garage, studio, barn or greenhouse.
- Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.
- Generally, there are two basic requirements for the taxpayer’s home to qualify as a deduction:
- There generally must be exclusive use of a portion of the home for conducting business on a regular basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.
- The home must generally be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home but also uses their home to conduct business may still qualify for a home office deduction.
- Expenses that relate to a separate structure not attached to the home may qualify for a home office deduction. They will qualify only if the structure is used exclusively and regularly for business.
- Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction:
- The simplified option has a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.
- When using the regular method, deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.
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