Ten years -- and three kids -- later, our old office is now our master bedroom. My "home office" is now a spot on the couch where I desperately attempt to get work done at odd hours. Fortunately, we've expanded outside of the home into a much larger office, so our dedicated work space is a few miles up the road. Even though I work from home quite a bit these days (it's part of what comes with being a parent and owning a business), we no longer claim a home office deduction on our tax return. We simply don't meet the criteria anymore.
To qualify for the home office deduction, you must use the part of your home attributable to business "exclusively and regularly for your trade or business," and that part of your home must be your principal place of business; a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or a separate structure used in connection with your trade or business. In other words, to be deductible, your home office must be your actual office and not just a spot where you occasionally work.
If you are an employee, as opposed to a self-employed person, there are additional criteria. Your business use of the home must be for the convenience of your employer (as opposed to just your own convenience), and you must not rent out any portion of your home to your employer. Your home office must be the place where your employer expects you to perform your job and not just a "helpful" location for you.
Whether you are an employee or self-employed, if you use part of your home as a work space, it must be exclusively work space. This is key. While it's not necessary to have a door that locks (a popular misconception based on old throwback rules), the space must be clearly delineated from your personal space. It must also be used only for business purposes. You can't write off your kitchen table space just because you use your laptop there, or your sofa (like me), since you occasionally sit there to catch up on your email. It must be dedicated space. There is an exception for certain storage use, rental use, or daycare-facility use -- for those spaces, you are required to use the property regularly but not exclusively.
Generally, the amount you can deduct depends on the percentage of your home that you use for business. If you can easily separate the expenses related to your home office (if, for example, it's a separate structure like a studio or a garage), you can deduct the actual expenses attributable to the space.
However, if the expenses for your home office are difficult to separate from your home expenses, you can calculate your home office deduction by pro-rating the use. Figure the amount of space attributable to your business compared with the total. For example, if your home office space is 200 square feet and your home is 2,000 square feet, you would claim 10% of your home-related expenses (insurance, taxes, mortgage interest, etc.) as a home office deduction.
Alternatively, if the rooms in your house are roughly the same size, you can calculate the percentage of business use by adding up the number of rooms and dividing by the number of rooms used for business. So, for example, if you have 10 rooms and use one room for business, you would claim 10% of your home-related expenses as a home office deduction.
There is one notable exception to the rules for deducting personal and business expenses: The IRS will not allow a business deduction for basic charges related to the use of your personal, primary phone line. You may, however, deduct the cost of an additional phone line or tally charges for long distance charges on your primary line.
To claim the home office deduction, file federal form 8829, Expenses for Business Use of Your Home along with your personal tax return.
But don't rush out to claim the deduction without thinking broadly. Before you file federal form 8829, keep a few additional items in mind:
- In some localities, claiming the home office deduction may subject you to additional local taxes and/or fees.
- Depending on the kind of business you have, your ability to work from home (including seeing clients or customers) may be restricted by local zoning laws.
- If you use property partly as a home and partly for business, you may not be able to claim the full capital gains exemption on the sale of your home. Generally, this applies to separate structures or depreciated property. Consult with a tax professional if you're not sure whether you'd be affected.