Many taxpayers do not like taking the home office deduction because they fear they might raise some eyebrow from the IRS. Sadly, this is true, especially if you take excessively large deductions. If you, however, qualify for the deduction, you will be surcharging yourself by not taking it.
Some people might think they have less incentive to itemize since the Tax Cuts and Jobs Act (TCJA) removed many itemized deductions, while almost doubling the standard deduction. Many self-employment deductions, however, remained untouched.
If you feel you qualify for some home office deduction after examining the IRS Publication 587, it is essential to know the home office expenses you can write off. The IRS Form 8829 covers this. To claim this deduction, you will have to file Form 8829 alongside your taxes.
Expenses are categorized into two: direct and indirect expenses. You can only apply direct expenses to the portion of your home that you use as your home office. This place must be exclusively used for business purposes. The deductible expenses for this office space will be painting, maintenance, replay, etc.
Indirect expense, on the other hand, has to do with the entire home. You can deduct these expenses from the percentage of your home dedicated to business. With this, if your home office is 15% of the square footage of your house, you can deduct 15% of all indirect expenses.
Here are the indirect expenses that you can deduct:
Mortgage Interest - IRS Publication 936 – Have in mind that if you got your home before Dec 16, 2017, the deduction only applies to interest on mortgage debts lower than $1 million. For mortgage debts that were taken after Dec 15, 2017, this limit was reduced to $750,000.
With this new law, irrespective of when the interest on home equity debt was incurred, the interest can only be deducted if it was used to buy, build, or renovate a home.
Real Estate Taxes – this deduction is limited to $10,000 for state and local taxes for married couples filing jointly. It is $5,000 for single taxpayers filing separately
Casualty Losses – You can deduct casualty losses, which can be direct or indirect expenses, depending on the nature of the damage. This deduction, however, only applies to losses declared as a disaster by the president.
It is important to note that you can deduct the expenses listed above even if you do not use your home for business. If you are itemizing personal deductions, all you need to do is divide the personal and business-related components between Schedule C (business) and Schedule A (personal)
Utilities and Services: you are permitted to deduct some percentage of household expenses like gas, water, electricity, trash, and cleaning service. Lawns trimming and other outdoor services are not among them.
Repairs: for repairs that apply to the entire house, such as electricity, you can deduct it in the right percentage.
It is, however, essential to note that the repair you are claiming must truly be a repair. An upgrade or house improvement, for instance, is not considered a repair. As a result, replacing the entire roof over your house is an improvement and not a repair. Repairing the roof right above your home office is a repair.
Security System: You can deduct the entire cost of a home security system based on some percentage in addition to the initial cost used in buying and installing the system. You can include this in your calculation.
There is also the option of submitting a simplified deduction of a fixed payment of $5 per square foot of home office. You can deduct this up to $1500 limit. If you are going through this route, you are allowed to deduct items that are not related to the use of your home—for instance, office couch, office supplies, etc. You can know if the simplified deduction will work for you or not by reviewing the most substantial home office deduction.
There are qualified tax professionals that can help if you are not comfortable with home office deductions. However, be sure you do not give up on deduction that deserves because you fear the IRS audit. This article can guide you on the right path.
