10 IRS Rules for the Home Office Deduction

Today, it's easy to take a deduction on your home office. Top Photo Group/ThinkStock

The home office deduction is your golden ring. It makes up for all that miserable time spent toiling after-hours for an unsympathetic boss in your windowless, tiny little den. Sure, you were working overtime with nobody but your dog to impress, but at least you get that sweet tax write-off for your glorified home cubicle.

Unless, of course, you don't get any write-off at all. You don't work there full-time, and you don't really need the office for your job; before you know it, you're not claiming it as a deduction. Which is a real shame, because even though around 26 million Americans have home offices, just 3.4 million claim them on their taxes as a deduction [source: Eisenberg].

So let's get down to business and decide if you qualify for a home office deduction. First up: Can you even take a home office deduction if you're not self-employed?

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Employee Break
Whether you're an employee or a contractor, you may fit the criteria for a home office deduction. Purestock/ThinkStock

Now, taking a home office deduction as a self-employed person might seem like a no-brainer if you work at home. You and the IRS both know that if you have a job and no other office, a certain amount of your bills and expenses are going to be going toward the cost of running your business by necessity.

But don't think that just because you're not self-employed doesn't mean a deductible home office isn't attainable. If employees meet all the requirements set forth by the IRS, even people who work outside of their home can take a home office deduction. While many used to think that claiming a home office deduction left a taxpayer vulnerable to audits, a few changes to the process have made claiming a (legit) deduction a lot easier.

So whether you're self-employed or working for the (wo)man, let's explore what exactly you need to do to claim a home office deduction.

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Exclusive Use
Your office has to be an actual space that's only used for business. David Sacks/Digital Vision/ThinkStock

First off, let's begin by saying that claiming a home office is useful because you can claim items -- or a portion of items -- you wouldn't normally be able to claim for exemptions. (Think that Internet bill, or even the office chair you bought.)

One big rule: You need to use your home office exclusively as your principal place of business. That means that you can't claim the 4 feet (1.2 meters) surrounding the couch in your living room as an office space, because obviously you're not exclusively using it for business. (Unless your business involves binge-watching "House of Cards," in which case I'd like to give you my resume.)

So got that? You don't necessarily have to use an actual room of your house only and exclusively for work, but the work area should have some clear demarcations.

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Regular Use
You have to use your office as an office regularly … not just once a quarter when you stay at home to meet the exterminator. Poligonchik/iStockphoto/ThinkStock

Next up, you need to use the home office regularly. And again, this doesn't mean that you regularly walk into the room, practice your signature with a nice fountain pen for ten minutes and then walk out. You do need to use the room consistently for business.

Now, this doesn't mean that you must use the room every weekday for huge chunks of time. Say you have a part-time gig writing a newsletter detailing changes or updates in your trade. If you spend every Saturday using the office to write the newsletter, you're still golden.

Just remember that the exclusive use rule still applies: You and your family shouldn't really be spending lots of time hanging out in the office for recreation. Even if you're only using your office one day a week for work, be wary trying to claim a deduction if it's packed to the gills with pinball machines and miniature golf greens for nonbusiness days.

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Meet Clients or Customers
If you're using a space to meet clients and customers, you may be eligible for the deduction. Nyul/iStockphoto/ThinkStock

Here's a fun rule. Even if you primarily work at another location, you can still claim your office -- or even part of your home -- as a deduction if you're regularly meeting with clients, patients, associates, customers -- anybody who's using your services, basically. This sounds terrific, right? Just Skype into a few daily briefings from home, and that home office deduction is yours.

Predictably, it's not that easy. First of all, remember you still have to meet our first two requirements: exclusive and regular use of your home office. When meeting with clients and customers, you have to meet some pretty specific requirements too. They have to be in-person meetings (texting a client from your den isn't cutting it), and your home must be integral for you to conduct business. This might seem confusing, but consider who the IRS is trying to give a break to: people who literally have a professional office in their home. A chiropractor who works from home, for instance, has substantial reason for conducting business there.

In other words, it's not a rule that's generally designed to be met by any yahoo inviting strangers over to buy stuff.

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Freestanding Structure
Even a freestanding structure, like this greenhouse, can be an office if you're using it for work. a40757/iStockphoto/ThinkStock

You actually have a decent number of ways you can qualify a freestanding structure for a home office deduction. It doesn't necessarily have to be a computer-printer-copier-packed studio with a neon "OFFICE" sign over the door. Workshops, garages, barns -- any structure you use exclusively for work counts. You don't even have to meet clients there, and it doesn't have to be your principle place of business.

The example the IRS gives is so pleasant that it deserves to be repeated (albeit with my own idyllic embellishments). Say you run the cutest little floral shop ever on Main Street. If you have a greenhouse in your backyard that you use to grow your flowers and plants for the shop, you can write off some of its (qualifying) expenses as deductions. It doesn't matter that you have a place of work on Main Street; you're using that greenhouse solely for your business [source: IRS]. So not only do you get to have a lovely job where you nurture plants and flowers all day, but you get a tax break for your super cool greenhouse, too. Lucky you!

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Storing Inventory
Storing inventory in your closet? It's work space. luanateutzi/iStockphoto/ThinkStock

Remember how the IRS insisted you had to use your home office exclusively and regularly no matter what to get a deduction? There are actually a couple of ways you don't have to meet that test to get your deduction. The first is if you run a daycare. (We won't get too far into that, because it's a really complicated deal.) But the other option might be more inclusive and fairly easy to meet.

If you're using part of your house for inventory storage or product samples, you can deduct the space. Keep in mind there are still some requirements: You have to sell products at wholesale or retail for your business, your home is the only (fixed) location of your business, you use the storage space consistently and the space is identifiable as a storage space. Obviously, the products must also be kept in your home.

So if you're selling water bottles door to door (I don't know your life) and keep all your supplies stored in one room of your house (or even a separate portion of your basement), you can write off some of the qualifying expenses.

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Percentage of the Home
If you want to get specific, you'll need to figure out how much of your home is being used as an office. innovatedcaptures/iStockphoto/ThinkStock

Now that we've talked about a few rules to claim the home office deduction, it's about time we jump into rules about the deduction itself.

If you're excited to find out the flat fee you can claim as an itemized deduction for your home office, we have some bad news. The actual dollar amount you can claim is wholly dependent on your very specific circumstances -- the IRS doesn't just tell you to subtract $1,000 from your income if you have a home office. There are a couple of ways to do it, but we'll start with the most complicated method.

It's called the "actual expenses" method, and it involves taking the percentage of the home you use for an office and deducting certain expenses based on the percentage. While you could claim some of the solely business-related expenses in full, most of your expenses can only be written off based on the percentage they're used for business. Let's go to the next page to get into a little more detail about how to write off actual expenses.

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Direct and Indirect
Heating your office space is an indirect expense. KatarzynaBialasiewicz/iStockphoto/ThinkStock

As we pointed out on the last page, there are different kinds of expenses that you can take if you're claiming the actual expenses method of your home deduction. We'll see on the next page that this is one of the reasons the IRS introduced another method of claiming the home deduction: It can be a little tricky to figure out what and how much to write off using the actual expenses method.

Direct expenses are the ones that will allow for a full write-off. The catch is that they have to be wholly related to business costs. So if you're buying a copy machine for your home office (and it's solely for your business), you can write off the cost. Even repairs to the home office can be fully deducted.

Indirect expenses are probably the ones you'd really like to write off, though. That's stuff like the cost of the Internet, utilities, insurance and the like. Unless you're absolutely only using the Internet for work (please), you'll have to prorate it -- along with other indirect expenses -- based on the percentage you use for work. So you can write off your heating bill, but only up to the percentage you use it when you're conducting business. The rest is keeping your house comfortable in general, and the IRS isn't calling that an office expense.

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Simplified Deduction
A simple deduction for simple spaces: You can use a flat formula to figure out how much to deduct. niolox/iStockphoto/ThinkStock

When choosing between two tax options, it seems like a no-brainer to go with the option designated as "simplified." In 2013, the IRS decided the actual expense option (which we were just discussing on previous pages) was a pretty difficult way to deduct home office expenses. Kindly, they offered a simpler way.

The simplified deduction for home offices is a heck of a lot easier to claim. Instead of having to take pen to paper and try to get an accurate number for the percentage of your house -- and all the expenses -- used by your business, they decided to create an option that doesn't require as much math. In the simplified method, you simply claim $5 per square foot of your home office, up to $1,500. Using the simplified method, you don't have to figure out percentages of specific bills: Just take the square footage, multiply it by five, and you have your deduction.

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Don't Forget to Claim It
Once you've done all this work, don’t forget to include the deduction on your return! tab1962/iStockphoto/ThinkStock

This brings us to our last rule, which is pretty simple itself: Don't forget to claim your home office deduction if you earn it. While we've wagged a lot of fingers to discourage you from claiming a deduction you don't deserve, the point remains that a lot of people are not taking the home office deduction simply because it seems complicated or makes them fear an audit.

In reality, you should absolutely be comfortable claiming a home office deduction if you meet all the requirements, and it could save you some tax money. Even the IRS has acknowledged that the former actual expense rules were needlessly complicated for most small business owners or self-employed professionals. Adding the simplified deduction was designed to make it easier to claim a home office, so have at it.

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Author's Note: 10 IRS Rules for the Home Office Deduction

As a self-employed person, it's pretty easy for me to claim a home office deduction because I don't have to itemize my deductions to do it; it's a business expense. But if itemizing works in your favor, by all means follow the rules and claim the deduction. It's thrilling to write off a portion of that Internet bill.

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Sources

  • Eisenberg, Richard. "Secrets of Claiming a Home-Office Deduction." Forbes. Feb. 8, 2013. (Oct. 4, 2014) http://www.forbes.com/sites/nextavenue/2013/02/08/secrets-of-claiming-a-home-office-deduction/
  • Fishman, Stephan. "The Simplified Home Office Deduction." Nolo. 2014. (Oct. 4, 2014) http://www.nolo.com/legal-encyclopedia/irs-creates-simplified-home-office-deduction.html
  • Fishman, Stephen. "The Simplified Home Office Deduction." Nolo. 2014. (Oct. 4, 2014) http://www.nolo.com/legal-encyclopedia/irs-creates-simplified-home-office-deduction.html
  • IRS. "Home Office Deduction." Oct. 1, 2014. (Oct. 4, 2014) http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Home-Office-Deduction
  • IRS. "Publication 587." 2013. (Oct. 4, 2014) http://www.irs.gov/publications/p587/index.html
  • TurboTax. "The Home Office Deduction." Intuit. 2013. (Oct. 4, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/The-Home-Office-Deduction/INF12067.html