Tax deductions are reductions of income that can be taxed by the government that an individual can claim when they file their taxes. The purpose of these deductions is to decrease the individual’s taxable income. This decreases the amount of income tax that the individual owes to the federal government.
There are numerous ways to use deductions to reduce an individual’s taxable income. However, many individuals do not know about the deductions or how to take advantage of them.
There are two main categories of tax deductions, standard deductions and itemized deductions. A standard deduction is a standard dollar amount that is set by the Internal Revenue Service (IRS) each year.
Itemized deductions are dependent on the amount that is being declared in each category. These may include:
- Casualty and Theft Losses;
- Charitable Contributions;
- Medical and Dental Expenses;
- Union dues;
- Home office expenses;
- Gambling losses;
- Interest paid on investments;
- Property tax;
- Personal property tax; and
- Job-related expenses.
What is a Home Office Tax Deduction?
Many individuals, especially in recent times, who have small businesses also have home offices which makes them eligible for tax deductions. The home office tax deduction is available to renters and homeowners of all types of residences. If an individual qualifies, it may significantly reduce the amount of taxes they owe each year.
When an individual uses part of their home for a business, they may be able to deduct expenses for what the IRS refers to as the business use of their home. Some of the costs of running the home that may be deductible include:
- Utilities;
- Rent;
- Insurance;
- Depreciation;
- Mortgage interest;
- Real estate taxes;
- Some casualty losses;
- Repairs; and
- Home improvements, if they related to the portion of the home used for the business.
This deduction may also be applicable to parts of the home including:
- A studio;
- A workshop; and
- A garage.
What are the Requirements for Home Office Tax Deduction?
An individual’s home may be considered:
- A house;
- A condo;
- An apartment;
- A mobile home; and
- A house boat.
The individual simply must be able to sleep and cook in the residence for it to be applicable. There are only two main requirements an individual must satisfy in order to claim a home office deduction. These are exclusive use and principal place of business.
What is Exclusive Use?
This is the more difficult of the two requirements to satisfy. The individual must demonstrate that a portion of their home is regularly and exclusively used for their business. An individual may qualify if their office is in a separate room or is sectioned off in a bigger room, especially if by a partition.
It is important to note that the IRS is very particular about this requirement. Even if an individual works in what is designated as their home office, if they allow others in their home to use the office space for other purposes, it is not being used exclusively for the business. If that is the case, it cannot be considered a home office deduction.
For more information that may be applicable to these issues, read the following LegalMatch articles:
What is a Principal Place of Business?
The taxpayer must also demonstrate that they use their home as their principal place of business. If the individual conducts business at a location that is outside of their home, but they also use their home substantially to conduct business, they may still be able to qualify for the home office deduction.
For example, if an individual has in-person meetings with their clients, but they also conduct business at home, they can deduct their expenses for the part of their home that is used regularly and exclusively for their business.
Deductions for the home office are usually based on the approximate percentage of the individual’s home that is devoted to running their business. For example, if an individual uses an entire second bedroom to conduct their business, they would need to determine what percentage of their entire home the second bedroom occupies.
What if I Store Inventory and Product Samples at my Home?
If an individual stores inventory or product samples at home, they can deduct expenses for the business use of their home, whether or not they use the storage space exclusively for business. This, however, has 2 limitations.
First, the individual will not qualify for the deduction if they have an office or other business location outside of their home. Second, the individual must store the products in a particular place, such as a garage or close. It is acceptable to use the storage space for other purposes as well, so long as it is regularly used for storing inventory or product samples.
Can I Deduct Home Office Expenses as an Employee?
If an individual is an employee and their use part of their home for the business, they may still qualify for a deduction. They must, however, satisfy two requirements, which include, their business use must be for the convenience of their employer; and they must not rent any part of their home to their employer and use that rented portion to perform services as an employee for that employer. Even if an individual uses a part of their home for business, if it is done merely out of convenience, they cannot deduct expenses for the business use of their home.
What Expenses at My Home Office are Tax Deductible?
There are several different types of expenses at an individual’s home office which may be classified as tax deductible. These include:
- Tax return real estate tax;
- Mortgage interest;
- Utilities;
- Operating expenses; and
- Depreciation.
It is more complex, however, than just simple deductions for all of those expenses. An individual must use the following qualification method to determine if they are eligible for a tax deduction:
- If the rooms in an individual’s home are not of equal size, they must divide the number of square feet used for home office space by the number of total square feet of the home. Then, apply the resulting percentage to their tax deductible expenses to figure out how much of each expense actually stems from the home office.
- If the rooms in the individual’s home are the same size, they may base their home office tax deduction on a comparison of the rooms used for home office space against the total number of rooms.
It is important to note that, even if an individual does not meet requirements for a home office deduction, they may still qualify to deduct ordinary business expenses.
Should I Seek Legal Counsel to Help with Home Office Deductions?
Yes, it is essential to have the assistance of an experienced tax attorney to help you with your home office deductions. Tax laws are very complex and may be difficult to completely understand. These laws are changed yearly, making it even more difficult to keep up.
Your attorney can help you understand the current tax laws and how they affect your home office expense deductions. If you are required to go to tax court for any reason, your attorney can represent you. Your attorney can help you understand the deductibility of your expense and help you minimize your income tax bill as much as possible.
