The home office deduction has been alternately viewed as lucrative and dangerous. Does it raise your chance of getting audited? Can you really deduct your rent payment? The home office deduction is not a free-and-clear opportunity to live tax-free. However, taken correctly, it can help to reduce the costs associated with running a business out of your home. Note that W-2 employees are not eligible for the home office deduction, even if they’re working from home. Following the rules is key, as we saw in a 2014 tax court ruling on personal use of a home office that illustrated how restrictive the IRS is on home office rules.
For the case in question, the taxpayer had a small studio apartment in New York City. She used a portion of the studio apartment as her home office. Because of the size of her living space, the taxpayer had to walk through her home office to get to her bedroom. The tax court ruled that walking through her home office to get to her bedroom did not violate the exclusive use thresholds and she could take the deduction (Miller, TC Summ. Op. 2014-74).
The IRS has very specific rules it applies when evaluating whether or not a home office is truly a home office. A home office should be a space that is regularly and exclusively used for business. If you use a home office for business most of the time, but spend the weekend surfing the web or relaxing in that room, this will jeopardize your deduction. In the tax court case, the IRS took issue with the taxpayer simply walking through her home office to get from one side of the apartment to another.
Here are some things to consider in order to protect your home office deduction:
- Are you using the space exclusively for business? Or is it a family room that doubles as a home office?
- If it is not your primary business location, are you using the space to conduct regular business, including meeting with clients? Having space to take extra office work home on the weekends is not enough to meet the Principle Place of Business requirement.
- Is your home office in a high-traffic area of your home? The IRS is looking for reasons to disqualify the deduction. Can you see a tv from your desk?
- What sort of recreational capabilities does your computer have? If your home office is also your gaming headquarters, that is not exclusive business use.
If you do have a space that meets the exclusive and regular use requirement and the principle place of business requirement, then there is good news. This year the IRS has introduced a simplified standard method for calculating your deduction. IRS Publication 587 has some good information on what records to keep and what qualifies. Before claiming the home office deduction, we highly recommend consulting with a CPA who can help ensure you’re following the rules. Contact us if you would like to schedule a consultation.