HOME-OFFICE DEDUCTION

You may qualify for some tax deductions by deducting a part of your home’s normal operating expenses such as utilities, insurance, rent, and depreciation.  The tax-saving opportunities depend not only on the type of work you do at home, but where in the home you perform the work functions.  There are two requirements that must be met to qualify for any home-office deduction.

1.      You must use the room or the space REGULARLY and EXCLUSIVELY for business.  Using a room such as a den that is also used for personal use such as watching television or playing games on the computer disqualifies the deduction, although using a portion of a room regularly and exclusively can qualify that portion of a room for the deduction. 

2.      The home-office must be either your principal place of business or a place where you meet or deal with clients or customers.  If the home is your only business location, or if it is the only place in which substantial administrative and managerial activities take place, the deduction can more easily proven.  An employee can qualify for the deduction only if you work at home “for the convenience of your employer.”  The fact that it is more convenient for you to work at home is not enough.  And, even if your employer requires you to work out of your home, the regularly and exclusive requirements must be met.  Just having an office to work at home to catch up, or for a teacher to grade papers, is not sufficient to qualify for the deduction.

Two important tax issues to consider before claiming the deduction are: 

1.      As an employee, the home-office expenses are classified as “Other Deductions” on your itemized deduction schedule.  As such, only the amount that exceeds 2% of your adjusted gross income can be claimed as a deduction.

2.      The deduction is only for the amount of space you use as the home office.  Say you use a 10 X 12 room, 120 square feet, out of your 2,400 square foot home.  This equates to 5%, so you can claim 5% of your utilities, insurance, and home cost.  If your utilities were $2,400 a year, and insurance $800, the deduction you could claim would be $160, in addition to 5% of the home cost depreciation or rent.

Claiming a home-office deduction can have a future tax impact upon the sale of your home.  If you own and occupy your home as your primary residence for at least two years, the first $250,000, $500,000 on a joint return, of profit on a sale is tax exempt.  All of the gain from a home sale up to the above limits is eligible for the exclusion if both the the residential and the home-office portions of the home are in the same dwelling unit, as an example, one room of a home used as an office of a business.   However, if the home-office space claimed is separate from the dwelling unit, as examples a separate workshop or an office in a converted garage, then the gain must be allocated between the units and the profit on the home-office portion is not excluded.   So, if you claim 10% of your home as home-office and make a $250,000 profit on the sale of your home, you would pay taxes on $25,000 of that gain.  And remember, upon a sale you will always recognize as income all of the depreciation that you claimed on the home-office, regardless of whether or not it is in the same dwelling unit.