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Rules for Home Office Deduction for Businesses

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One of the things I’ve learned when running a business is that you should try to take all the business deductions you can and the one that has always scared many business owners is that of the home office. The rules behind taking a home office deduction is quite simple since there are only two but since many folks skirt the line between an official home office and a pseudo home office, they haven’t taken it for fear of an audit. Luckily, the house I own has a whole bunch of rooms that I can’t possibly be utilized at 100% – so my home office really is a home office.

How Do You Qualify For The Deduction?

Essentially there are two tests you must pass for your home office to actually count as a home office:

1. You must use your home office regularly and exclusively for business

In order to take the full deduction, the office itself must be entirely used for business and nothing else. Now, the office can be an area so you can deduct 50% of your family room if half of it is business and half is pleasure. For me, one of the bedrooms in my house is entirely used for business so I can deduct that area but the closet has some of my clothes so that part isn’t deductible (I won’t include it).

2. Your home office must be your principal place of business

To qualify as a principal place of business, you must do the most important part of your work in that office OR you must do your administrative or management activities in that office AND you can’t perform those admin and management activities in another office. For me, I do 90% of my blog writing at home and all of my administrative activities here since my books reside locally on this computer.

How Do You Calculate The Deduction?

Again, there are two methods for calculating the deduction but any “reasonable method” will suffice. I recommend that you go with the percentage use method: measure the square footage of the home office area and divide by the total square footage of your home. Why that one and not the percentage based on the number of rooms? Publication 587 explicitly spells out the percentage rule (page 25) I just explained so it’s a “safer” bet.

How Much Of A Deduction Can You Get?

Here’s the fun part… you can deduct a whole bunch of stuff (whatever percentage you calculated above) like mortgage interest to real estate taxes (jackpot!). Everything is pretty self-explanatory and explained on Form 8829 Expenses for Business Use of Your Home in plain English. There’s another deduction for depreciation of your home but I’ll go into that in another post as it gets pretty involved.

Please let me know if I got anything wrong or I misinterpreted something. As with everything I write, especially when it deals with taxes and the government, be sure to consult with a professional before you do something stupid like listen to me. :)

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12 Responses to “Rules for Home Office Deduction for Businesses”

  1. Randy says:

    I work 100% full-time from home and have a dedicated room for my office. I agree with everything you mention.
    However, don’t forget the consequences of all this if you go to sell your home. Basically, you continue to depreciate the asset and then, when you sell the home, the difference between the new depreciated value and the actual sell value is profit, which can be taxed.
    This may or may not apply, but be careful here and consult a professional before getting into a situation.

  2. jim says:

    Excellent point Randy and one thing to consider is that you have to recapture depreciation if you were eligible to deduct it, even if you don’t! So if you run a business and claim it as a home office but you don’t claim depreciation, you still have to recapture it when you sell your home. It’s a crappy rule but it the government avoids having to look through your paperwork… that’s why I’m going to claim depreciation if/when I claim a home office.

    As for the gain aspect, the first $250k of gain on a home, if you use it to buy another home, is tax free. It’s $500k if you’re married.

    But, I do agree, consulting a tax professional is a good idea… anyone out there? :)

  3. Steve says:

    Being in a different country we have slightly different legislation. I have to say, how nice is it to work from home? To be in control. where I live, I have a view of the Versace Hotel, the ocean and the main street of the Gold Coast.

    every day i wake up, I look at that traffic, and am incredibly grateful to not be in it.

  4. Gina says:

    I have never seen it not worthwhile to take the home office deduction. The depreciation that may be recaptured is minimal in comparison to the benefits received. I wrote an article about it on my blog, here’s the link: http://glgcpa.blogspot.com/2006/08/is-home-office-deduction-worth-it.html

  5. prlinkbiz says:

    I know some states have little tweaks, like the office may have to be separate from the home, so it’s good, like you said to check the details out. This is one of the things I love about owning my own business and working from home- there are so many tax advantages as well as personal advantages to doing so.

  6. Jen says:

    How can i apply this to rent? I dont own, but pay a monthly rent for my apt. i dedicate and set up one corner of my apt solely for my home business. Does this work also?

  7. Great information. I’d just add to REALLY use an accountant. They can tell you for sure if you qualify or not. If you use one of these people your chances for an audit are next to nothing ;)

    \- Bryan
    http://www.BryanCFleming.com

  8. Matt says:

    Isn’t the home office deduction an acknowledged red-flag for the audit-scheduling software, though?

    Tax avoidance stops just barely shy of being an actual religion for me, but I’m hesitant to claim write-offs that make it substantially more likely I’ll get hauled into the IRS office and grilled on my business expenses.

  9. Geoff says:

    This is a follow-up to Gina’s post. The tax on the gain arising from depreciation recapture on a home office is at a 25% rate which can be an unpleasant surprise for taxpayers whose effective rate would other be below that. Granted, the tax is paid with ‘cheaper’ dollars in a later period. But, also be mindful that depreciation on a home office, I believe, can only be taken to the extent there is net income. So, in ventures that don’t show very much income currently, generally, I would advise clients NOT to take the home office.

    The Sec 122 exclusion does not cover the gain on the home office. But, as of late, with the real estate market as it, if the home is sold at a loss I don’t think there would be a gain, so that is a big advantage.

  10. Geoff says:

    excuse me, it was IRC sec 121.

  11. Geoff says:

    btw, great article!

  12. Shelly says:

    I was wondering, if you have a home office, are not married and all of the utilities are in someone elses name, can you still tax home-office deductions? All the utilities are in my boyfriend’s name but I pay half of everything. I didn’t know if that mattered or not. Thanks for any help!


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