Home Office Deduction
Written by Nick Sarinelli, CPA
If you’re self-employed and work out of an office in your home, and if you satisfy the strict rules (discussed below), you may be entitled to favorable “home office” deductions for the following:
- Direct Expenses of the home office—for example, the costs of painting or repairing the home office, depreciation deductions for furniture and fixtures used in the home office, etc.; and
- Indirect Expenses of maintaining the home office—for example, the allocable share of utility costs, insurance, mortgage interest and real estate taxes.
In addition, if your home office is your “principal place of business” under the rules discussed below, the costs of travelling between your home office and other work locations in that business are deductible transportation expenses, rather than nondeductible commuting costs. And, generally, you can deduct the full cost of computers and related equipment that you use in your home office.
You may deduct home office expenses if you meet any of the three tests described below:
- Principal place of business test. You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, as your principal place of business. Your home office is your principal place of business if it satisfies either a “management or administrative activities” test, or a “relative importance” test. You satisfy the management or administrative activities test if you use your home office for administrative or management activities of your business, and if you meet certain other requirements. You meet the relative importance test if your home office is the most important place where you conduct your business, in comparison with all the other locations where you conduct that business.
- Home office used for meeting clients or customers test. You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, to meet or deal with clients or customers. The clients or customers must be physically present in the home office.
- Separate structure test. You’re entitled to home office deductions for a home office, used exclusively and on a regular basis for business, that’s located in a separate unattached structure on the same property as your home—for example, an unattached garage, artist’s studio, workshop, or office building.
The amount of your home office deductions is subject to limitations based on the income attributable to your use of the home office, your residence-based deductions that aren’t dependent on use of your home for business (such as mortgage interest and real estate taxes), and your business deductions that aren’t attributable to your use of the home office. But any home office expenses that can’t be deducted because of these limitations may be carried over and deducted in later years.
Be aware that if you sell your home, a portion of any gain may be taxable based on the amount of depreciation you claimed on the home office. Proper planning can be the key to nailing down the optimum tax treatment for your office at home expenses.
Please contact Nick with any questions at (973) 298-8500 or firstname.lastname@example.org.