More people are working from home now than ever before due to COVID-19. If this is you, you’re probably interested in the home office deduction and knowing how it works. First, you might qualify for the deduction if you operate a business out of your house. If you qualify, you can deduct a wide variety of expenses, including, some of your rent or mortgage costs, insurance, utilities, repairs, maintenance, and cleaning costs related to the space you use.
The deduction can be a tricky area of the tax code with many pitfalls. Here are five common mistakes people make regarding this deduction.
1. Not taking the home office deduction
This is probably the biggest mistake people with home offices make. Some believe the deduction is too complicated, while others believe taking it increases your chance of being audited. Don’t worry, there’s a simple deduction calculation method available.
2. Your home office isn’t exclusive or regular
You must use the space exclusively and regularly for your business to claim this deduction. How do we define these terms?
Exclusively: If you use a spare bedroom as a business office, it can’t double as a guest room, a playroom for the kids, or a place to store your hockey gear. Any kind of non-business use can invalidate your space for the deduction.
Regularly: It should be the primary place you conduct your regular business activities. That doesn’t mean you have to use it every day and it doesn’t stop you from doing work outside the office. But, it should be the primary place for business activities such as recordkeeping, billing, making appointments, ordering equipment, or storing supplies.
3. Mixing up your other work
If you’re an employee for someone else and you run your own business, you’ll need to be careful about mixing your work and work locations. Generally, the IRS states you can use the home office deduction as an employee only if your employer doesn’t provide you with a local office to work at.
This is especially important to keep in mind during the coronavirus pandemic. If your company’s office is temporarily closed due to COVID-19 and you must work remotely, you can’t claim the deduction. This is because your employer still provides a local office.
Unfortunately, this also means if you run a side business out of your home office, you can’t bring work home from your employer’s office and do it in your home office. That would invalidate your use of the deduction.
4. The recapture problem
If you’ve been depreciating part of your home in relation to this deduction, you could be in for a future tax surprise. When you sell your home, you’ll need to account for this depreciation. The depreciation recapture rule creates a possible tax liability for many unsuspecting home office users.
5. Not getting help
There are special rules that apply to your use of the deduction if:
- You’re an employee of someone else;
- You’re running a daycare or assisted living facility out of your home; or
- You have a business renting out your primary residence or a vacation home.
The home office deduction can be tricky, so ask for help – especially if you fall under one of the above cases. Contact us for help!.
The IRS created a simplified safe harbor home office deduction to provide some tax relief to individuals who work out of their house. Here’s how it works:
Take the square footage of your office, up to 300 square feet, and multiply it by $5. This gives you a $1,500 maximum deduction. If you think your savings could be greater than $1,500, it’s worth getting help from a tax professional to calculate your full deduction.
If you’re concerned about a potential future audit, take photos of your home office. This is especially important if you move. If you’re ever challenged, you can visually attempt to show your compliance with the rules.
Have questions about the home office deduction? Let’s talk!