Do You Qualify for a Home Office Deduction?
April 5, 2017 by Gordon Advisors
Business operations are changing dramatically. Many companies are now offering work from home options; eliminating brick and mortar and moving to a virtual environment. You may be eligible to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters.
Even if you have not previously qualified it is still possible to claim the deduction. After reading this article you will better understand the home office deduction.
Your home office qualifies as your principal place of business for deducting expenses for its use if you use it exclusively and regularly for administrative or management activities and you have no other fixed location where you conduct substantial administrative or management activities. There are many activities that are considered administrative or managerial in nature. Such activities include:
- Invoicing customers, clients or patients
- Keeping books and/or records
- Ordering supplies
- Setting up appointments
- Forwarding orders or writing reports
The following activities performed by you or others will not disqualify your home office from being your principal place of business:
- You have others conduct your administrative or management activities at locations other than your home. For example, another company does your billing from its place of business.
- You conduct administrative or management activities at places that are not fixed locations of your business, such as in a car or hotel room.
- You occasionally conduct minimal administrative or management activities at a fixed location outside of your home.
- You conduct substantial non-administrative or non-managerial activities at a fixed location outside of your home. For example, you meet with or provide service to customers, clients or patients at a fixed location of the business outside of your home.
- You have suitable space to conduct administrative or management activities outside of your home, but choose to use your home office for those activities instead.
Qualifying for a Deduction
To claim expenses for the business use of your home, you must meet the following tests:
- Use of the business part of your home must be: exclusive; regular; for your trade or business, and
- The business part of your home must be one of the following: Your principal place of business; A place where you meet with patients, clients or customers in the normal course of your trade or business, or A separate structure (not attached to your home) you use in connection with your trade or business.
There are additional tests for employees which must also be met:
- Business use of your home must be for the convenience of your employer, and
- You do not rent all or part of your home to your employer and use the rented portion to perform services as an employee.
To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or another separately identifiable space. The space does not need to be marked off by a permanent partition.
To qualify under the regular use test, you must use a specific area of your home for business on a continuing basis. You will not meet the test if your business use of the area is only occasional or incidental—even if you do not use that area for any other purpose.
Trade or Business Use
To qualify under the trade or business use test, you must use part of your home in connection with a trade or business. If you use your home for a profit-seeking activity that is not a trade or business, you cannot take a deduction for its business use.
Calculating Your Deduction
After determining that you qualify for a deduction, you can begin to figure out how much you may deduct. You can deduct certain expenses related to the business use of your home, but your deduction is limited by the percentage of your home used for business and your deduction limit. There are two methods for figuring your deduction:
- Simplified Option
For taxable years starting on or after January 1, 2013, you may use the simplified method which will reduce the recordkeeping burden. The simplified option applies a standard deduction rate based on the square footage used for business. Home related expenses, such as mortgage interest and real estate taxes are itemized on Schedule A. However, no home depreciation deduction can be taken for the years the simplified option is used. For more information refer to Simplified Option for Home Office Deduction.
- Regular Method
Taxpayers using this method must track and record actual expenses incurred for the use of their home office. Expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Generally, these deductions are based on the percentage of your home devoted to business use. To find the business percentage, compare the size of the part of your home that you use for business to your whole house. Use the resulting percentage to determine the business portion of the expense for operating your entire home.
Although you can use any reasonable method to determine the business percentage, there are two common methods used to compute this figure:
- Divide the area (length x width) used for business by the total area of your home.
- If the rooms in your home are all about the same size, divide the number of rooms used for business by the total number of rooms in your home.
If your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation) you can deduct all of your business expenses. If it is less than your total business expenses your deduction for certain expenses is limited.
If you qualify to deduct expenses for the business use of your home, you must then divide the expenses of operating your home between personal and business use. There are three types of expenses: direct, indirect and unrelated.
Clearly, deducting the use of your home for business purposes is a complex area. Nonetheless, it provides many entrepreneurs the ability to save substantial revenue and therefore should be a primary concern if you are operating your business out of your home.
We are happy to speak with you and to provide you with greater guidance as to these expenses, their allocation and your ability to meet the qualifying tests.
Located in Troy, Michigan, Gordon Advisors, P.C. is one of Southeast Michigan’s leading public accounting and business consulting firms. For over 60 years, Gordon Advisors, P.C., has been respected and recognized for our expertise, dedication, and commitment to providing exceptional service to our clients. Our firm prides itself on the extensive involvement of our shareholders and senior management throughout the performance of the services we provide to our clients. We provide efficient, cost-effective service by selecting team members with appropriate skills and experience to handle your needs. At Gordon Advisors, P.C., we assist clients in developing strategies to meet their personal and financial planning objectives by providing tools they need to really add value to the businesses they own and manage. For more information, please visit www.GordonCPA.com.