Posted by Carmen Garcia

Home Office Tax Deductions For 2020

Home Office Tax Deductions For 2020

As a home business owner, you can make several tax deductions related to the cost of running your business, including expenses incurred to run your business from a home office. There was a time when the home office deduction was supposed to increase the chances of an IRS audit, but today more than 50% of small businesses operate from home, making it a regular home office and not a red flag. However, the IRS requires that the office complies with specific rules before one can claim deductions from the office.

The best way to dodge problems is to claim the deduction from the Home Office only if you are eligible, to claim the expenses to which you are entitled, and to properly document your expenses only if the IRS questions your eligibility or the number of expenses you are trying to request if in doubt, consult a tax specialist (better option) or contact the IRS for clarification, be sure to document your communications with the IRS.

What is the home office deduction?

The home office tax deduction provides tax exemption for taxpayers who use part of their home for work. It is not only limited to owners but is also available for tenants and people living in condos, apartments, and any other type of accommodation.

There are three basic requirements for claiming a home office deduction:

    •    You must be self-employed: Before the 2017 Taxation Cuts and Jobs Acts (TCJA), the home office deduction was available for the self-employed and individuals who had a home office for the comfort of their employer. But the TCJA has eliminated most of the itemized deductions, including unpaid labor costs, such as the home office deduction. Currently, only the self-employed can claim a deduction at the office.

    •    You must use your home office exclusively and constantly: You should only use your home office for business. For example, if you work at the dining room table and use it for family meals, you cannot claim a home office deduction from the dining table. The good news is that the home office doesn't have to occupy an entire room. It can be a corner of the bedroom or the living room. As long as you use this space regularly and exclusively for business, you are entitled to a deduction.

    •    Your home office should be the primary place of business: If you usually do business outside the home, but occasionally work in a home office, you cannot claim a deduction from your home office. Your home should be the central place of business. This does not mean that from time to time, you cannot work elsewhere.

What expenses can I deduct?

Here are some examples of the types of costs that can be used to claim a home office deduction:

    •    Interest on the residential mortgage

    •    Rent

    •    Mortgage insurance premiums

    •    Invoices

    •    Insurance for owners

    •    Owners' membership fees

    •    Repairs and maintenance

    •    Security

    •    Property taxes

    •    Internet service

    •    Pest control

    •    Cleaning services

    •    Depreciation

There are also house maintenance fees that do not apply:

    •    Lawn care: Gardening and lawn care costs are generally not deductible unless clients meet regularly at the home office.

    •    Pool cleaning and maintenance: The IRS considers that the cost of managing a swimming pool is not related to the office or the house, so it cannot deduct these costs.

    •    Telephone charges: The cost of the first fixed home call is considered a personal expense, so it is not possible to include it in the calculation of the home office deduction. However, if the telephone company receives long distance calls, you can deduct these charges assuming they were made for your business as business expenses. If you have a second telephone line used only for business, you can deduct the cost of this line as a direct expense.

How to claim the home office deduction

There are two options for calculating the deduction from your home office:

1. The common method

The usual approach is to add the total residential maintenance costs for the year and multiply them by the percentage of the house used for business.

For example, suppose your home has a total of 1,100 square meters and uses 99 square meters (9%) for your home office. You would calculate the home office deduction by multiplying the indirect home maintenance costs by 8%.

Using the usual method, you can also deduct 100% of the direct costs of the home office. Direct costs are directly linked to the home office. 

If the usual method is used, the home office deduction will be calculated on form IRS 8829. The total deduction calculated on this form leads to line 30 of Schedule C (for individual owners and LLCs) or the part II a Schedule E (for associations with several members and LLC). If your business is structured as a company, unfortunately, you cannot take advantage of the deduction for a home office, because the IRS treats shareholders as employees of the business.

2. The simplified method

If monitoring the various household maintenance expenses seems too busy, the IRS offers a simplified method for calculating the deduction from your home office.

This method allows a deduction of $ 5 per square used for businesses, up to a maximum of 300 square meters. Therefore, with a 100 square meter office, your deduction will be $ 500 (100 square meters x $ 50).

You can choose to use the standard or simplified method to calculate your home office deduction each year.

If you are using the simplified method to calculate your home office deduction, you do not have to complete Form 8829. Simply enter the total number of square rooms in your home, the square footage of your office, and the deduction calculated line 30 of Schedule C.

Final Words

You might have heard rumors that the home office deduction is a red flag that increases your chances of an IRS audit. While this has been the case in the past, when home offices were scarce, technology and the growing number of people living online made them more common. Don't worry about increasing your chances of being checked.

Make sure you qualify and keep excellent records to support your deduction. You don't have to fear an IRS audit if you follow the rules. 

Carmen Garcia
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