Many freelancers or entrepreneurs are eligible to claim home office deductions, but are unsure if their home office qualifies under IRS requirements.
Here are some of the details you need to know this tax season.
You must meet the “exclusive and regular use” requirement
According to the IRS, a portion of your house can be considered a home office if you use the office for exclusive and regular use.
This means that your home office is your primary workplace, and that you do not have a separate office space that you rent or go to regularly OR an office space that you are required to report to, as in a 9-5 job.
If you have an office that is accessible to you but you choose to work from home since it is more convenient, you cannot claim a home office deduction.
Your home office can also occupy a section of a room if the division is clear (with a partition) and you can demonstrate that personal activities are not undertaken in the business area.
You might want to take some pictures of your office that clearly show you are using it for work purposes, in the event you are audited.
Your office must be used exclusively for work – you meet clients and perform business related tasks only here. Regular use means you must use the office on a constant basis (though not necessarily all day, every day.)
Even if you often visit clients in their home, you can still write off your own home office if you use it for administrative and business purposes – bookkeeping, ordering supplies, etc.
Calculating your home office deduction
Your home office business deductions are based on the percentage of your home used for the business. In order to calculate, measure the square footage designated for your home office and find what percentage it is of the total area of your home.
If the office measures 120 square feet, for example, and the total area of the house is 1,000 square feet, your business percentage would be 12% (120 ÷ 1,000).
If the rooms in your home are roughly the same size, you can figure the business percentage by dividing the number of rooms used in your business by the total number of rooms in the house.
You can also use the simplified method for claiming the deduction. This method uses a standard rate multiplied by the allowable square footage used in the home. For 2014 the rate is $5 per square foot with a maximum of 300 square feet.
With the simplified method, if the office measures 120 square feet, for example, then the deduction would be $600 (120 x $5).
The IRS says that you can claim $5 a square foot, up to a maximum of 300 square feet, so you have a maximum $1,500 deduction.
Additional home office expenses you can deduct
Because part of your home office qualifies as a business property, part of the overall costs can be considered business write-offs. If your office space takes up 10% of the house, for example, you can deduct 10% of your bills for utilities, homeowners insurance, and homeowners association fees.
Mortgage interest and property taxes are deductible expenses if you qualify for a home office deduction. If you rent the space where your home office is located, you deduct the same percentage of your rent as the percentage of your home dedicated to your business.
Additionally, you can also apply the deduct for general repairs and maintenance for your home office.
Howard Samuels is the Tax Partner at Rosenfield & Co PLLC, a full-service CPA firm. Howard has a master’s degree in Taxation from Pace University and holds his undergraduate degree in accounting from Syracuse University. Howard has been practicing accounting and tax for 22 years and has offices in NYC, NJ, and Florida. His email is Howard@Rosenfieldandco.com.