If you work from your home and meet certain IRS requirements, you can deduct many common home expenses as business expenses thanks to the home office deduction. Unfortunately, this deduction is the subject of widespread misunderstanding among taxpayers. Consider the following common assumptions about the home office deduction -- and get the real information you need to figure out whether you qualify and how to claim it.
True or false: You have to meet all kinds of tricky requirements to qualify for the home office deduction
False. There are just two requirements for claiming the home office deduction.
First, you must regularly and exclusively use that part of your house for business. If your home office is in your living room, and you watch TV in there every night with the kids, then you can't say the room is a home office. However, if your computer desk is off in the corner of the living room and you only use it for your business, then you could claim just that part of the room as a home office. If you're claiming part of the room, it helps to set up some kind of partition to mark off the space, such as bookcases or a set of curtains.
Second, the home office has to be your principal place of business. If you have a home office and you also lease office space downtown, you can't claim the home office deduction. However, if you regularly meet clients in your home office, you can claim the deduction, even if you have another place of business. The IRS has not set a specific requirement for how often you need to meet clients at home in order to qualify, but once or twice a week should be enough.
If your business requires you to work at the customer's site -- for example, you paint houses or give piano lessons -- you can still claim the home office deduction as long as your home office is the place where you regularly do your administrative work, i.e., paperwork, bookkeeping, and so on.
True or false: Calculating the home office deduction percentage would stump a rocket scientist
False. The calculation is actually quite simple. It's based on the size of the part of your house you've set aside as a home office. There are two basic ways to calculate the percentage: by square feet or by number of rooms.
Using the square-feet calculation, just measure the length and width of your home office area and multiply those two numbers together to get the square footage. Then divide the result by the total square footage of your house. The result is the percentage of whole-house expenses that you can deduct. For example, if your home office space measures 400 square feet and your entire house measures 1,600 square feet, then your deduction percentage is 25%, so you can deduct 25% of your qualifying home expenses.
The number of rooms calculation is even simpler. Count the number of rooms in your house, not including bathrooms or hallways. Then divide the number of rooms used for your home office by the number of total rooms in the house. For example, if you use one room for your home office and you have eight rooms in your house in total, divide one by eight to get your deduction percentage of 12.5%.
You can use either one of these methods to calculate your percentage, so your best bet is usually to try both and then stick with the one that gives you a bigger percentage. In the above examples, you would use the square-foot calculation because it yielded a result of 25% versus 12.5%.
True or false: You have to keep track of every single tiny expense for your house for the whole year
True...and false. If you use the standard method of claiming the home office deduction, you do need to track (and save receipts for) every expenditure related to your home. However, in order to encourage taxpayers to take the deduction, the IRS has added a simplified "safe harbor" method of claiming it. It's easy as pie: You measure the square footage of your home office and multiply that number by $5, and voila -- that's the amount of your deduction. Using this method, you can claim a maximum of 300 square feet for your home office (which works out to a deduction of $1,500).
Using the standard method will usually result in a larger deduction than the simplified method, especially if your home office is bigger than 300 square feet. However, it requires more work on your part to track all those expenses. If you don't feel it's worth the extra effort, by all means choose the simplified method. As a bonus, if you use the simplified method, you don't have to fill out Form 8829; you can just use your Schedule C to claim the deduction.
True or false: You can't deduct your mortgage payments through the home office deduction, but you can deduct rent payments if you rent your home
True. The home office deduction is an even sweeter deal for renters than for homeowners. However, homeowners do get plenty of nice expenses to deduct. Eligible expenses include rent, depreciation, insurance, repairs, home improvements, utility costs, security systems, casualty and theft losses, and even landscaping costs. (That last one is only an option if clients come to visit you in your home office.) To calculate the deduction, you add up all these expenses for the year and multiply them by your home office percentage. That's how much you can deduct.
Expenses that apply only to the home office part of your house can be fully deducted rather than multiplied by the home office percentage. For example, if you have the whole interior of your house painted, you can only deduct the home office percentage of that expense. If, however, you just have your home office painted, you can deduct 100% of the costs.
As long as you keep all the necessary paperwork and don't get greedy, the home office deduction can save you a bundle without costing you too much time or putting you at risk of an audit. See -- not so scary, is it?