How Can I Prepare My Home Office for Tax Purposes? - Tax Professionals Member Article By KLSM CPA Firm PLLC
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How Can I Prepare My Home Office for Tax Purposes?

How Can I Prepare My Home Office for Tax Purposes?

What is the Home Office Deduction, and who is eligible?

The home office deduction is a tax deduction available if you own a business and use part of your home for your business. Your home can be a house, apartment, condominium, or similar property. It can also include an independent garage, an office, a barn, or a veranda. The home office deduction is available for both tenants and homeowners.

To qualify for the deduction, you must be a partner or self-employed, such as a rideshare driver. However, if you work for an employer, you can no longer take advantage of the deduction: the Tax Cuts and Jobs Act of 2017, passed under the Trump administration, abolished the deduction for 2018-2025. This includes anyone who receives a W-2 or a regular paycheck from their employer. You may be eligible if you have a second job and also work for an employer.

Follow these simple steps to set up an IRS-compliant home office. 


Step 1: Choose a space

Your home office should be where your business activities take place. If you spend most of your time elsewhere, your home office should be where you perform your administrative or management tasks (assuming you use virtually no other fixed location to perform these tasks). Your desk, computer, filing cabinet, and shipping area (if you have one) should all be part of your home office space. You can use part of a room as a home office, but make sure personal spaces are separated from the workspace.


Inventory storage: If you use areas of your garage, basement, or attic storage space for your inventory, you can add it to your home office space to qualify for the deduction. You cannot deduct your entire basement, garage, or attic if you only use part of that space to store inventory.

The solution? Duct tape/Ribbons. You can use it to define the boundaries of the "commercial" part of your garage, basement, or attic. This way, if you are audited, the IRS agent can see where your home office space ends, and your personal space begins.

Note: An auditor rarely makes a home visit. Photos of your office should suffice.


 

Step 2: Measure your home office

To claim the home office deduction, you need to know the total square footage of your home (wall to wall) and the space of your home office.

Tip: Use masking tape to mark the boundaries of the "commercial" part of the garage, basement, or attic used for commercial storage. This way, if you are audited, the IRS agent can see where your personal space begins, and your home space ends.


Step 3: Choose a method

Percentage of your home method: Calculate your home office percentage. It's a fraction: the numerator (the top number) is the square footage of your home office, while the denominator (the bottom number) is the square footage of your entire home (wall to wall).

For instance, if your home office space is 1,000 square feet and your entire house is 4,000 square feet, your "home office percentage" is one-quarter or 25% (1000 ÷ 4000 = 0.25 (x 100 = 25%))


Simplified Square Footage Method: The IRS introduced a simplified option for claiming the deduction. This method uses a prescribed rate multiplied by the allowable square footage used in the home.

For the 2021 tax year, the prescribed rate is $5 per square foot, with a maximum of 300 square feet. The space must, in any case, be dedicated to the commercial activity as described above.

Using the simplified method, if your home office is 150 square feet, for example, the deduction would be $750 (150 square feet x $5 per square foot = $750)

Note: Home Office eligibility for the deduction occurs each year in both methods. Therefore, you may qualify one year, not the next, or vice versa.

 

Step 4: Start Deducting

If you have a home office, you can subtract your home office percentage from many of your household expenses, such as:

  • Mortgage interest

  • Property taxes

  • Utilities

  • Home Insurance

  • Income

If you own a home, you will also depreciate the commercial part for tax purposes. You generally cannot deduct expenses (such as lawn care and gardening) for parts of your home that are not used for commercial activities.


Some Special Rules

  • You cannot deduct more than your business's net income each year. (But like other operating losses, you can usually carry them forward to future tax years.)

  • You must complete Form 8829 and file it with your 1040 each year. 

  • If you write off your home for the home office deduction and then sell it for a profit, you will have to recover the write-offs you made and include them in your taxable income.

 

Step 5: Keep Good Records

Although the home office deduction is generally not an "audit trigger," you should keep good records, such as:

  • A copy of the rental contract (if you are renting)

  • Copies of Form 1098 showing mortgage interest paid each year

  • Document all other expenses you deduct

  • Real estate invoices (and canceled checks)

  • Utility and insurance bills

The Main Conclusions

  • Your home office should be the main place where you do business.

  • If you also work outside the home, your home office should be where you perform your administrative or management duties.

  • It is possible to use part of a room as a home office, but it is necessary to ensure that the corporate space is well separated from the personal space.

  • You can calculate the percentage of your home used for your office and deduct that percentage from allowable household expenses, or use the simplified option to deduct $5 per square foot of office space (2021 tax year), up to a maximum of 300m².


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