One of the significant social side effects of the COVID-19 pandemic is a wave of businesses and workers transitioning to a work-from-home model. You may be deliberating whether working from a home office will yield any tax breaks under the IRS home office tax deduction. If you are self-employed and are working from home, you may be eligible for an IRS home office deduction, which can help reduce your federal income tax bill.
While you may qualify for taking a tax break for your office expenses, you need to follow IRS home office deduction rules. Here is what you need to know about eligibility for IRS home office deductions.
Do You Qualify for the IRS Home Office Tax Deduction?
Not everyone with a home office will be eligible for a home office tax deduction. Here are the criteria you need to meet to qualify for IRS home office tax deductions.
- Regular and exclusive use: Generally, to qualify for a tax deduction home office, you must use your home office on a regular basis and exclusively for your business. For instance, you must use a part of your house, apartment, mobile home, condominium, or comparable structure for your business regularly. However, it doesn’t include your property that is exclusively used as a hotel, inn, motel, or similar business.
- Principal place of business: While your home doesn’t necessarily have to be the only location you meet your customers or clients, it must be your principal place of business – this means you must use your place regularly and exclusively for management or administrative activities such as keeping books and records, setting up appointments, and billing customers according to IRS locations rules.
Who Doesn’t Qualify for Home Office Deduction?
Before the Tax Cuts and Jobs Act (TCJA), the rules for the IRS home office deductions applied to both the employees and self-employed people who had a home office, so, if you are an employee who works at home, you, unfortunately, don’t qualify for the home office tax deduction between January 1, 2018, and December 31, 2025. Likewise, if you are self-employed and use a portion of your home for business but don’t qualify for IRS home office requirements, you wouldn’t be able to get deductions for home office.
Home Office Expenses IRS
IRS home office deduction related to your office includes equipment, maintenance, furniture, supplies, etc. Moreover, you can deduct a portion of your home office expenses. For part of your home-related expenses, you are required to compare the amount of your home office space with the total space of your home.
How to Determine Your Home Office Tax Deduction
The value of your deduction can be calculated either through a simplified or regular method. If you decide to simplify the process, you are not actually deducting expenses. With the simplified method, the square footage of the property is multiplied by a prescribed rate. You will get a deduction for a home office of $5 per sq ft of your office home.
In contrast, the regular method is more complicated. It values your home office IRS by measuring the actual expenditures against the overall residence expenses. You can also deduct taxes, mortgage interest, insurance, repairs, utilities, home insurance, and other expenses.
The Standard Option
The standard method involves the computation of the actual amount of the home office expenses against the overall residence expenses incurred on a property. The standard option of the IRS home office deduction will be determined after the completion of the IRS Form 8829.
The form is divided into four parts. The first part helps to calculate the portion of the house used for business. The second part details the business income accruable to the business, which will thereafter be used in calculating the home office tax deduction. The third part calculates the depreciation incurred in the course of running the business, and the final part determines the disallowed expense amount that can be transferred to the following year. The standard option is also known as the hard option because it establishes a painstaking approach to calculating actual expenditures against the overall residential expenditure in determining the exact IRS home office deduction. It warrants home office business owners to keep records of all expenses, including the seemingly personal ones such as utility bills, repairs, and equipment purchases, etc.
The Simplified Option
The simplified option is the most common method because it prescribes a fixed rate for calculating home office tax deductions. It prescribes a flat rate of $5 per square foot for up to 300 square feet of space. Basically, home office owners are empowered by law to deduct $5 per square foot up to 300 square feet for a maximum deduction of $1,500. That way, you get to enjoy tax breaks so far as you can establish that your home space does not exceed 300 square feet. Just as the name implies, the simplified option makes home office tax deduction quite straightforward for home business owners as they no longer have to keep track of specific expenses.
How Do You Take the Deduction?
Business owners filing their IRS home office tax deductions through the simpler option can report their income and expenses directly on the Schedule C form. In partnership businesses where multiple owners can lay claim to the proprietorship of the business, then each of the partners must clearly state their share of the income or loss incurred on the business in Schedule C. However, IRS home office tax deduction may be payable by all the partners involved; hence, there will be a need to separately file self-employment tax.
The standard option, on the other hand, compels entrepreneurs to fill and submit form 8829 together with their income tax return. They are also mandated to clearly state the total business deduction from Schedule C before their IRS home office deduction can be officially recorded. The falsification of data or the lack of declaration of any of the key components required can invalidate the whole process and put the business at risk of closure or a fine from the government.
What If You Were Self-Employed for Just a Few Months?
In specific instances where the type of work is periodic, seasonal, or contractual, such business owners are eligible for a limited home office tax deduction. For instance, freelancers who work based on gigs secured from clients will have their IRS home office deduction calculated according to the time the gig was active and the time it was concluded and approved by the client. In this instance, if the gig was concluded in a month and modifications requested by the client took another month to complete, then the IRS deduction home office levy on such will be prorated according to two months.
In other words, the home office tax deduction will only be payable for the time duration that the business was active. Essentially, the deduction for the home office will be rated based on the months the owner received revenue and incurred expenses in the management and administration of the business. It is not a requirement that the business must be active for the whole month for the IRS deduction home office for month to be in effect. The business only needs to be active just for 15 days within the month for the IRS home office tax deduction to be due on it.
Considering that expenses are payable for business owners who only work occasionally, recurrent expenses such as rent and utilities can also be deducted or calculated based on the months the business was active. Entrepreneurs on the simple option can therefore calculate the fixed $5 per square foot of their office space and then arrive at the home office tax deduction payable per month.
The deduction for a home office is implemented based on the current capacity of the individual. There is a provision for the outstanding balance to be carried forward till the following year if the entrepreneur cannot offset the bill at once. For instance, if the entire income of the entrepreneur totaled $500 but the income generated for the year is $400, then the balance of $100 will be carried over to the following year.
Who Doesn’t Qualify for Home Office Deduction?
It is required that a workspace must be used exclusively for work purposes for it to qualify for home office deduction. In situations where the space is used for dual purposes, such as residential and commercial purposes, such space will be excluded from the IRS home deduction office tax. The space could be anything from a condominium to a regular apartment or even a boat, but such space must be regularly used for business purposes.
How to Determine Your Home Office Tax Deduction
The simplest way is to measure the square footage of the home office as a percentage compared to the total area of the home. Alternatively, in the event the size of the rooms in the house are exactly the same, you can determine your IRS home office tax deduction by dividing the number of rooms you use for business or commercial use by the total number of rooms in that facility. If the home office is 200 square feet in size, then the tax deduction home office will be calculated as 200 x $5, which would be $1000.
IRS home office deduction must be accurately calculated according to the stipulated guidelines. You must know the spectrum of what qualifies for tax deductions and must apply them accordingly in order to legally activate the home office tax deduction on your behalf. The purchase of office chairs, tables, and other stationeries that may be referenced as tax deductible on Schedule C. Anything that contributes to the successful running of the business can be penciled down for tax deductions. The 5% flat rate for calculating the simplified option was decided in 2022. Subsequently, the figure may be reviewed by the IRS, but such a move would be summarily communicated to the public in advance.