Qualifying for a Home Office Deduction
Home office deduction rules are a bit tricky but all you need is a little attention to detail. If you work from home and plan to claim a home office tax deduction, consider the answer to these questions first:
Are you using your home office exclusively and regularly for either:
- Your principal place of business,
- A place to meet with clients in the normal course of your business,
- In any connection with your trade or business where the business portion of your home is a separate structure not attached to your home,
- On a regular basis for certain storage use (see storage of inventory or product samples), or
- As a daycare facility.
If you answered yes, to any one of the three options listed above, then you have met the requirements for a qualified home office and you can claim the deduction. You will be able to deduct a percentage of you household expenses such as rent, mortgage expenses, utility bills, repairs, insurance and home depreciation. The value will depend on what percentage of your total home square footage your home office occupies.
Compare the size of your home office with the size of your whole house. The resulting percentage will be used to determine the business part of expenses. There are two common ways of calculating this percentage:
- Divide the area (length x width) used for business by the total area of your home.
- If the rooms in your house are all of similar size then divide the number of rooms used for business by the total number of rooms in your house.
There is a limit to how much you can deduct. If your business gross income is less than your total business expenses, your deduction for certain expenses is limited. You can only claim home office deductions up to the amount of business income for the year and no more. If your business expenses exceeded your business income, you can carry over the excess to the following year’s taxes but they will be subject to next year’s deduction limit.
You must keep accurate records that support all deductions for the business use of your home. Records should be kept for a period of 3 years from the date filed.
What if I don’t qualify for the home office deduction?
Some deductions are available even if you don’t qualify for the home office deduction e.g. home mortgage interest and real estate taxes are allowed as an itemized deduction on Schedule A of your tax return. You may be able to depreciate the cost of office equipment and furniture used in your home office, even if you are not allowed to deduct the cost of the office itself.