The Internal Revenue Service (IRS) allows certain self-employed individuals or business owners to deduct expenses related to using a home for business purposes, if they meet specific conditions. This rule applies to individuals who operate a business or use part of their home exclusively for business purposes. Taxpayers must adhere to stringent requirements and maintain proper records to claim this deduction.
Eligibility for Home Office Deduction
The IRS outlines the criteria for the business use of a home in Publication 587. Below are the key requirements:
Exclusive Use Rule
A specific area of the home must be used solely for business purposes.
Mixed-use spaces (e.g., combined personal and business use) do not qualify.
Regular Use Rule
The designated area must be used regularly for conducting business activities.
Occasional use does not meet the requirement.
Principal Place of Business
The home office must be the primary location for substantial administrative or management tasks.
Even if work is performed elsewhere (e.g., client sites), the home office can qualify if it is used for significant administrative activities and no other fixed location is available for these tasks.
Expenses That Can Be Deducted
Direct Expenses
Costs specifically related to the home office (e.g., painting or repairs in the office area).
Indirect Expenses
A proportional share of general home expenses, including:
Mortgage interest or rent
Property taxes
Utilities (e.g., electricity, heating)
Insurance
Depreciation (for homeowners)
Unrelated Expenses
Personal expenses, such as lawn care or general home improvements, are not deductible.
Calculation Methods
Simplified Option
Deduct $5 per square foot of the home used for business, up to a maximum of 300 square feet (maximum deduction: $1,500).
Minimal recordkeeping required.
Regular Method
Deduct actual expenses based on the percentage of the home used for business.
Requires detailed tracking and documentation of relevant costs.
Carryforward Rules
Simplified Method
Home office deductions cannot be carried forward.
If business expenses exceed business income, resulting in a loss, no deduction is allowed for that year, and the excess cannot be carried forward.
Regular Method
Unused deductions from home office expenses can be carried forward to future years.
This applies if business expenses exceed income, provided eligibility for the deduction continues in subsequent years.
So, if carrying forward deductions is a key consideration for you, the regular method may be more advantageous.
Conclusion
For assistance in calculating your home rule tax deductions, ensuring your business remains tax compliant, and maximizing your deductions, contact the trusted Chugh, LLP accounting team.
