A home office tax deduction can be a great way to reduce your taxes if you own a small business. The home office deduction gets a bad rap because a few years ago, deducting a home office was seen as an “audit trigger.” However, that issue was blown out of proportion then, and it is almost a non-issue these days, provided you do have a business and a legitimate home office. So, how do you deduct home office on taxes?
How To Qualify for a Home Office Deduction
Qualifying for a home office tax deduction for your business is pretty simple, providing you have a home office that you use. The official rules state that your home office must be your primary place of business, and that you use the office exclusively for that business. In other words, you can’t deduct the little area you have setup in the corner of your living room as a home office.
People giving tax advice will often go overboard here saying things like, if there is even one toy in your office, then it is disallowed as a deduction. This scares legitimate small business owners with home offices from deduction them sometimes.
Keep in mind that the IRS does not have a crystal ball, and they can’t tell if your kid has ever left a bouncy ball behind in your office. If your office and business are legit, then by all means deduct them. If you don’t really think your office is a “real” office, then you’ll need to closely read the rules. There is a whole flowchart in Publication 587 that helps taxpayers determine if their home office qualifies for the home office tax deduction.
Sometimes people get confused by what is meant by “primary place of business.” Years ago, doctors who worked at hospitals, but did not have an actual office at the hospital would claim a home office as their office. The IRS ruled that this does not count because the doctors actually do most of their primary work at the hospital. Just because they don’t have an office there doesn’t mean that they get to claim an office at home. If you do your work from home, you can claim a home office. If you are a 1099 employee, but you work 40 hours per week on-site, then you are most likely not allowed to claim a home office for that business activity. However, if you have additional client work, for example, that you work from your home office for, then you can deduct your home office.
Does Your Business Qualify for the Home Office Business Tax Deduction?
If your business qualifies as a “business,” then you qualify. If you file a Schedule C and tax business tax deductions, then the home office deduction is just another one of those. All the same rules apply. You must have a profit motive. If your business is profitable in three out of five years, then you automatically qualify.
Where to Claim Home Office Deduction
You claim a business home office deduction on Line 30 of Schedule C. You figure out how much of a home office deduction you get by filling out Form 8829. The math on this form sucks and it gets tricky and complicated fast. Even worse, the numbers you calculate on your Form 8829 can affect other numbers elsewhere in your tax return. For example, if you deduct some of your mortgage interest as part of your home office, then you must reduce the amount of mortgage interest you claim on your Itemized Deductions on Schedule A.
Bottom line, if you are claiming the home office tax deduction, then use some tax software like TurboTax Home & Business. Make sure you get the version that calculates the home office deduction. Most tax software doesn’t do that in their cheapest version.
If your business makes money, and you use a room in your house as an office, there is no reason for you to not claim this valuable tax deduction.
By Brian Nelson – Brian is a former Certified Financial Planner and financial advisor. He writes for the Finance Gourmet and other financial publications. The material provided on this website is for informational use only and is not intended for financial or tax advice. ArcticLlama, LLC, FinanceGourmet.com, and Brian Nelson, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please note that material may not be updated regularly and that some of the information may not be current. Consult with your own tax professional when making decisions regarding your tax situation.