Home Office Deductions and You
Updated: Jun 25, 2020
Are You Claiming this Awesome Deduction?
Saving you money is our favorite thing to do! One of the best parts of our job is the chance to play “detective” and find the best deductions and credits that can save you money on your taxes! Do you work from home? If so, are you claiming your Home Office Deduction? If you’re one of our amazing clients, we probably already claim this on your taxes (one more
reason why an accountant is well worth the investment!) The Home Office Deduction reduces your taxable income by deducting the cost it takes to run your business from home. Instead, it treats those costs as a business expense! There are two major rules of the game - keep reading to discover them!
“Exclusively and Regularly as Your Principal Place of Business”
For one, your home business must adhere to the statement above. This means that your home (or part of your home) is where the magic happens. So, if you’re a web designer, your home office must be where you web design. Obviously, there might be days you spend working in a coffee shop for a change of scenery, but your office should be the principal place. You can also claim this deduction when you only use one room of your house for work. For example, if you have a desk in your living room that is your principal place of business, you can claim the square footage of your workspace. More on the specifics of this later!
“Exclusively and Regularly as a Place to Meet Clients, Customers, or Patients in the Normal Conduct of Your Business”
Secondly, this statement means that clients could be coming to your door. Of course, parts of this depend on your industry, too. If you’re an architect working from home, you may spend more time at client sites. However, if the client should need to come meet with you, your home office should always be an option.
Relevant Types of Expenses
Because “Home” is part of your Home Office Deduction, there’s a need to separate what counts and does not count as an office expense. There are three main types of expenses: direct, indirect, and unrelated. If in doubt on where to categorize your expenses, a tax preparer can help!
Direct Expenses are office-only expenses. These include repainting your office, buying office furniture, or buying office supplies. You’ll be able to fully deduct these from your tax return! Be sure to keep your receipts for everything that you purchase!
Indirect expenses are expenses for your entire home that also affect your home office. These include things like utilities, wifi, rent, property tax, insurance, repairs, and security costs. Because only a small portion goes toward your home office, you’ll partially deduct these proportionally to the size of your office space.
Unrelated expenses include your personal groceries, landscaping, or other services that do not impact your home office at all. These cannot be partially deducted.
Tricky Expenses - Telephones!
Telephones are particularly tricky, especially if you use them for both work and pleasure. Your first landline is a personal expense. However, if you use it for long-distance business purposes, you can separately deduct the amount in Schedule C. If you add a second landline for business, that is considered a direct expense. But what about cell phones? They are proportionally deductible depending on the balance of business and personal use.
Tax Form Deep Dive - “Expenses for Business Use of Your Home”
Let’s take a closer look at Form 8829.
You’ll file this form with a Schedule C (Form 1040 or 1040-SR depending on your age). You can also find instructions here to help you navigate trickier areas. Let’s go part-by-part and break down this form!
Lines 1 & 2 - Use the square footage of your home to determine the areas. These will come in handy later when you’re proportionally allocating your expenses.
Don’t include any expenses here you could allocate with inventory costs. These expenses will go into Schedule C, Part III.
Also note that if you’re a daycare, there are slightly different caveats to this part of the form. Refer to the instructions, or reach out to Practical Accounting Solutions for guidance!
This is where your understanding of direct and indirect expenses comes in handy! If you’ve been coding and allocating your receipts all along, this shouldn’t be too tough. If you’re still unsure about certain expenses, give us a call and we can help! We know that bookkeeping can be a pain - ask about our small business bookkeeping services!
This section talks about the depreciation of your home. There are two ways you can calculate this:
1. Adjusted Basis
Adjusted basis helps you estimate what gains or losses may occur when you sell your home.
Do you love an easy formula? Here’s one to calculate Adjusted Basis quickly:
Adjusted Basis = (Original Cost of Home + Improvements & Related Expenses) - Deductions for Depreciation and Depletion
Want more information? Check out this post by Bankrate
2. Fair Market Value
You can also use Fair Market Value to estimate your depreciation. Fair Market Value is the price that buyers are willing to sell, and sellers are willing to buy. There are a few different ways you can do this, too.
Love to DIY? You can calculate your fair market value by looking at data of houses in your neighborhood that sold within the last six months. Take note of the following:
Total Acreage of Interior and Exterior
If you want to find this information, you can visit RealtyTrac, contact a local tax assessor, or look through real estate portals.
Another way to find the fair market value is through a real estate agent’s appraisal management service. Note that there is likely a fee charged for this service, so it may not be worth it unless you’re planning to sell your home soon.
Other Resources that Might Help You Discover the Fair Market Value of Your Home:
This is another tricky area. Take a look at the Instructions for breakdown of these percentages. Still need help? Give us a shout at Practical Accounting Solutions!
Practical Words of Advice
1. Keep Your Receipts
This deduction is the easiest to misreport, so it’s extra important to keep your receipts. You’ll need to be able to prove every last dollar, especially if there’s a discrepancy in what you’re reporting. Need help keeping track of your shoebox of receipts? Ask about our bookkeeping services!
2. COVID-19’s Effect
With everyone working from home, it might be tempting to try using this deduction. However, it’s a bit more complicated that you may think! Check out this awesome article from Nolo about how to deduct if you’re an employee with a home office.
3. Tax Plan
Make an appointment each year after tax season to make a plan of action for your taxes. By planning ahead, we can help you prepare for success and save even more!
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Disclaimer: The views presented in this post are meant as educational resources and should not be taken as direct advice for your personal finances or small business. Should you have questions regarding a post relating to your specific finances, please contact us at email@example.com.