Q: Tax Playa, I am a self-employed taxpayer. Can I take a home office deduction?
Regi, Norfolk VA
A: In general, there is a deduction allowed for business use of a home, or a "home office." How and if you can claim it varies greatly depending on your work situation, though...
For more on the home office deduction, please consult IRS Publication 587, Business Use of Your Home.
In order for a home office to qualify as such, it must be:
- Exclusive. The room or area can only be used for business. No personal use.
- Regular. Business is consistently-conducted here. Occasional use won't do.
- For a trade or business. Not just any profit-seeking activity (like investing) will do.
In addition, the room must be the principle place where your business is conducted. This means either:
- You normally meet your clients at this location, or
- The exclusive and regular administrative aspects of your business are conducted here.
How to Calculate the Deduction
If you qualify for a home office deduction, it is calculated by multiplying the total cost of your home by the business percentage. This can be done either as a room/number of rooms in the home ratio, or as a square footage percentage. Part-year deductions must also factor in time.
Home expenses that can be multiplied by the business percentage include but are not limited to:
- mortgage interest
- property taxes
- depreciation (over 39 years, 40 if in AMT)
- homeowners insurance
- cleaning and maintenance
- homeowners association and condominium fees
- other depreciable equipment like computers (5 years) or furniture (7 years) in the office
Some costs will be general to the home (indirect). These must be multiplied by the business use percentage. Some (like repairs, utilities, or other depreciable equipment) may be used more directly with the home office. In this case, you can take a full deduction for their business use.
A home office deduction cannot generate a loss to the extent that otherwise non-deductible items generate that loss. Basically, that means that anything besides mortgage interest and property taxes simply roll over into a future business year that is profitable.
Any mortgage interest or property taxes not claimed as a home office expense (the personal percentage) carry over to the Schedule A.
How Differently-Situated Taxpayers Qualify
1. Self-employed. The home office deduction is taken as another deduction on the Schedule C. It is both pre-income tax and pre-self employment tax.
2. Employees. You can claim a home office deduction as a miscellaneous itemized deduction (subject to the 2% of AGI threshold), but there are some limits. The office must be the primary place you do business, and you must be there for the convenience of your employer. Also, if you rent space to your employer and perform services for him, only otherwise-deductible expenses are allowed (mortgage interest, property taxes, casualty losses).
3. Partners. If required by your partnership agreement, you can claim a home office deduction as an expense on Schedule E, being sure to attach the 8829 form