If you use part of your home for business, you may be able to deduct expenses for a home office. This year, due to the COVID-19 pandemic, many people are working from home, so this information is relevant for the 2020 tax year. The IRS has specific rules to qualify for home office deduction and you need to meet the guidelines in order to be able to use deductions. The business use of your home deduction is available to both homeowners and renters and it applies to all types of homes.
We hope this guide helps you in learning what the criteria are on qualifying for the tax deductions of home office use.
Definition of “Home”
A “home” as it relates to home office use includes a house, an apartment, a condominium, mobile home, boat, or similar property that provides basic living accommodations. It also includes structure on the property such as an unattached garage, studio, barn, or greenhouse.
Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use an entire room or part of a room for conducting your business, you must figure out the percentage of the home being used.
Qualifications to Deduct Expenses for Business Use
In order to qualify to deduct expenses for the business use of your home, you must use part of your home as below:
- Exclusively and regularly as your principal place of business
- In the case of a separate structure that is not attached to your home, it must be used in connection with your trade or business
- On a regular basis for certain storage use
- For rental use
- As a daycare facility
If your home office is a specific area in your house that you use for trade or business, then it meets the “exclusive use” test. The area doesn’t have to be marked off by a permanent partition to be considered the home office used exclusively. It can be a room or other separately identifiable space. If you use the area for both business and personal purposes, you do not meet the requirements for the exclusive use test.
However, there are some exceptions:
- If you use an area for storage of inventory or product samples. When your trade or business is selling products at wholesale or retail and your home is the only fixed location for your business, you use the storage space on a regular basis, and the space is a separately identifiable space suitable for storage. Examples might include a garage or basement.
- If you use your home as a daycare facility.
In order to qualify under the “regular use” test, you must use a specific area of your home for business on a regular basis. Incidental or occasional business use does not qualify as regular use.
Trade or Business Use
The requirement for the “trade or business use” test is using part of your home in connection with a trade or business. For example, you may use part of your home for reading trade journals for your business, but that does not qualify for the deduction. This is an ancillary task and is not actually doing business, so you cannot take a deduction for this activity.
Principal Place of Business
You may have more than one business location, such as an office other than your home in addition to your home. To qualify to deduct the expenses for the business use of your home, your home must be the principal place of business for your trade or business. To determine whether your home is the principal place of business, consider these aspects:
- The relative importance of the activities performed at each place you conduct business
- The amount of time spent at each place where you conduct business
If you meet the following requirements, then your home office qualifies as your principal place of business:
- You use it exclusively and regularly for administrative or management activities of your business.
- You have no other fixed location where you conduct substantial activities for your trade or business.
If, after considering your business locations, you determine that your home cannot be identified as the principal place where you conduct business, then you cannot deduct home office expenses. Furthermore, if you are an employee of a business and you are deducting expenses for a home office, you must not only prove exclusive use of a space but show that it meets the “convenience of the employer”, meaning the employer required it.
Expenses That Can Be Deducted
These are the kinds of expenses you can deduct from your taxable income when your home office meets the exclusive use or regular use testing requirements:
You can deduct part of the rent you pay. To figure out how much you can deduct, multiply the rent payment by the percentage of your home used for business. If you own your home, you cannot deduct the fair rental value of your home; however, you can use depreciation of your home.
You can deduct the cost of repairs that are relative to your business, to include labor of a contractor (not your own labor). For example, furnace repair affects your entire home. If you use 10% of your home for business, you can deduct 10% of the cost of repairing your furnace. Examples of common repairs are things like patching walls and floors, painting, repairing roofs and gutters, and fixing leaks. But, if a repair is actually a permanent improvement of the home such as replacing a roof, then it is not deductible.
You can deduct the installation, maintenance, and monitoring of a security system per the allocation of your business use (for example, 10%) in the home.
Utilities and Services
You can deduct the business part of expenses such as electricity, gas, trash removal, and cleaning services.
If you have a separate telephone line for your business, you can deduct it. You cannot deduct the primary telephone line for your home, but you can deduct any business long-distance phone calls on that line.
Depreciating Your Home
If you own your home and qualify to deduct expenses for business use, you can claim a deduction for depreciation, which is the wear and tear on the part of the home used for business.
While we are currently experiencing work-from-home due to the COVID-19 pandemic, some people may be able to deduct their home office expenses. If you are an employee of a business, as a W-2 employee, there are no substantial deductions or tax benefits for working from home, as of the writing of this article.
If you are classified as a self-employed worker (you typically file a Schedule C for your business), then you can take deductions from some home office expenses. Such items as internet and cell phone bills can be deducted based on an allocation between personal and business use. A tax advisor can help you in figuring out these deductions.
Contact Us for Tax Guidance & Preparation
At Steward Ingram & Cooper, we are here to help you navigate the complexities and various methods of determining and calculating tax deductions for a home office. Our tax professionals are experts in working with these types of deductions and we work closely with businesses and individuals in the Raleigh, Cary, Wake Forest, and Wilson areas.