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Can you deduct your home office?

A deductible home office is an area in the home that is both used exclusively for business and is where you do a substantial amount of work, not just where you “manage” your investment.  It is often the only fixed location for your business.   You look at whether or not you can claim a home office deduction every year.  To claim your home office, it must pass one of the following tests:

  1. the principal place of business for any of your businesses or
  2. used in the ordinary course of business for meeting with patients, clients or other customers, or
  3. part of a trade or business that is in another structure  that is not attached to the residence

If you pass one of the above tests, you need to decide which calculation method you will use for that year.  There are two allowable methods and both use the office’s actual square footage as “per room” allocations are no longer allowed.

The actual method (actual expenses times the percent of  home that is the home office):

  • Requires detailed record keeping of utilities, interest, taxes and other applicable items
  • Reduces itemized deductions by the home mortgage interest and real estate taxes deductible by the home office
  • Requires depreciating the part of your residence which is your home office
  • Creates ordinary income from otherwise excludible gain when selling of your home for the home office depreciation previously expensed
  • Cannot create a loss but unused home office deductions are carried forward to the “actual method” year

The safe harbor method ($5 per square foot deduction for up to 300 square feet up to $1,500):

  • Requires no expense records
  • Does not reduce itemized deductions for home mortgage interest or real estate taxes
  • Requires no depreciation
  • Creates no gain adjustment when selling your home
  • Cannot create a loss and any unused deductions are lost

This is a yearly process requires applying complex rules to the current facts and circumstances. Consult with your tax advisor or contact us with questions.

Sharon McAlister About Sharon McAlister

Sharon has over a decade of income tax experience and has worked in local, regional and international public accounting firms. She specializes in individual taxation and in small businesses and enjoys helping people succeed. If you have questions for Sharon, please send her an email. To see other posts by Sharon, click here.

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