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Filing Taxes: Take the Office-In-Home Tax Deduction

Written by Eva Rosenberg on April 3, 2012 in Tax  |   3 comments

“Stay away from that. It’s a major red flag!” That’s what I keep hearing from people as they’re filing taxes. “Oh no, I don’t want to risk an audit. Not on my return—no office-in-home deduction for me.” Don’t be silly. Practically everyone is working from…

“Stay away from that. It’s a major red flag!”

That’s what I keep hearing from people as they’re filing taxes. “Oh no, I don’t want to risk an audit. Not on my return—no office-in-home deduction for me.”

Don’t be silly. Practically everyone is working from home these days. Thanks to special new security precautions and filing systems, even IRS staff can work from home.

Home office rules for both employees and business owners

In order to be considered a home office, a space must be your primary place of work—where you meet with clients, patients, or customers; where you do all your paperwork, make all your calls to schedule appointments, and keep all your business records; or where you store all of your inventory. You must have a specific, separate area where you work.

This means that using the dining room during the day and then using that area for the family meal at night doesn’t count. Instead, you must establish a permanent room or part of a room or garage for your desk, equipment, or inventory.

Home-office expenses are always limited to employees’ W-2 income or business owners’ profits. Tax-deductible expenses include the business percentage of:

  • Rent or mortgage interest and property taxes
  • Homeowners insurance
  • Utilities
  • Maintenance, gardening, and landscaping
  • Security systems
  • Homeowners association fees
  • Housekeeping

Naturally, all expenses directly related to the business space are fully deductible, including business insurance.

In addition, homeowners must depreciate the business part of the home. It does complicate things now and when you sell the house, but that’s another story.

Starting with employees

To claim office-in-home deductions, the employee must be using the home for the employer’s convenience. Get this in writing!

Sometimes, this is obvious—for example, a company is located in Ohio and the employee’s sales territory or customer base is in New Mexico and Texas. Or a company might be in the same town but might lack the office space for the employee to be on site.

It’s important that employees doing similar jobs receive the same treatment. If not, it could be asked why one employee is working at home while others work in the office. Define the reason, in writing. For instance, you might note that you work at night and it’s too costly for your employer to provide nighttime security at the office.

Employees report office-in-home costs on line 4 of Form 2106. To compute the expenses, there’s a worksheet in IRS Publication 587.

Being self-employed

Many people are running their businesses from home. It’s cheaper and more convenient—and definitely a green alternative.

Although losses are limited to business profits, business owners can apply the unused losses on future years’ tax returns. These losses reduce your future self-employment taxes, as well as income taxes.

Report your home office expenses on Form 8829. Note that there is a special area for daycare businesses to compute the business space based on hours used, rather than the exclusive business use of the space. The bottom of the form has the depreciation computation. That’s also where you’ll find the line for the unused depreciation to carry over to the next year.

Real red flags when filing taxes

Seemingly duplicate expenses on Schedule C will attract attention. Report all utilities on Form 8829; don’t take them as line items on Schedule C. When renting storage space, don’t put it on the rent line on Schedule C—put it on one of the blank lines on page two instead. Having both rent and a Form 8829 is a red flag.

Final tip

Since you’re not paying office rent, use the money you save to pay down your mortgage. This trick has helped many people be mortgage-free today.

READ MORE:
Money Management Tips: Storing Your Paperwork
Last-Minute Ideas for Saving Money on Your Taxes
Documenting Your Donations for Tax Deductions
Tax Deduction for Claiming Elderly Relatives and Dependents
Tax Tips: Tax Implications of a New Baby
Paying Taxes on Self-Employed or Side Income

Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.

3 comments

  1. Keyur says:

    My wife’s employer is in California and she works from home (in Georgia). Is she eligible for home office deduction?

    Her job is computer related so she doesn’t have to meet anyone and she never steps out of the home for business purposes.

    Also, she uses one room in our house which is just for her work.

    Any guidance in claiming home office deduction is greatly appreciated.

    Thanks for your help

  2. Eva Rosenberg, EA - Your TaxMama says:

    Hi Keyur,

    Thanks for the question.

    I have a some questions for you.

    1) Was your wife hired while she was already living in Georgia?
    If so, she was hired for the company’s convenience, because she has special skills they need and could not find locally.
    Have them give her something in writing to that effect.
    Use the office in home deduction.

    2) Was she hired in California, then moved to GA and is working from home for HER convenience?
    She probably isn’t entitled to an office in home deduction.

    3) Does she need to be in GA for the company’s benefit, for some reason?
    If yes – go for it.
    If not – nope.

    The best way to address not getting the office in home deduction is to work things out with the company and revise the compensation a bit to accommodate the lost deduction. Friendly negotiations never hurt. (Not aggressive arguments – just a nice tax chat.)

    I hope this helps?

  3. Jeffrey Zeisler says:

    I have a client who just brought on another guy to be a partner in his consulting business from out of town. The new partner will be moving to the area eventually, but while he still lives out of town and travels in to town 4 days a week can he establish a home office at his primary residence so that he can take any business expenses deductions?


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