October 6, 2015

FAQ – What Qualifies as a Home Office?

If you own a small business, you undoubtedly work from home, at least on occasion. If you’re like many small business owners in today’s world, you might even work exclusively from home. Whichever category you fall under, claiming a “home office” on your taxes can be tricky. Here’s a quick step-by-step guide to make sure you’re in line with IRS standards when it comes to your home office.

Home Office for a Small Business Owner

First, to claim a home office on your taxes, both of these things must apply:

You use the part of your home exclusively and regularly for your business. If an auditor were to come to your home, they would be able to easily identify your home office. This means the area can’t double as a play area for children or living room for your family. It should look just like a regular office would.
The business part of your home must be one of these to qualify:
- Your main place of business
- A place where you meet or deal with clients
- A separate structure (not attached to your home) that you use for your business

Exclusive Use Explained

Exclusive use means you use the area in your home for business purposes only. The area must meet these requirements to be considered “exclusive”:

A room or other separately identifiable space, but it doesn’t necessarily need to be separated by a wall or permanent partition
The space cannot be used for business and personal purposes
The area cannot contain personal-use furnishings like a TV or a couch, even though these items are common in many businesses

Regular Use Explained

Regular use means you use part of the home on a continuous, ongoing, or recurring basis. You can use the space for more than one business, and you can have more than one business location (other than your home office) for each business as well. However, if you’re deducting a home office on your taxes, your home must be the principal place of business. Factors considered in “regular use” of a home office include:

Meeting clients or conversing over phone, Skype, or email
Selling or delivering goods or services
Administrative activities of your business like billing customers, bookkeeping and accounting tasks, ordering supplies, setting up appointments, contacting customers
Updating your website, managing SEO, and other computer-based tasks

If you’re employed by another company and work from home, you can also claim a home office. Here’s how:

You must meet the home office requirements above.
Factors determining home office eligibility as an employee may also include:
- The employer requires you to maintain a home office as a condition of employment.
- Your work for their business isn’t possible without a home office.
- The employer doesn’t provide a space for you to work outside your home office.
- You don’t rent any part of your home to your employer and use the rented portion to perform services as an employee.

If you’re already working from home and haven’t set up a home office, now is the time. Home office deductions can save you big money on your taxes and help keep your small business activities more organized.

FAQ – What Home Office Expenses are Tax Deductible?

When it comes to home offices, it’s all about the tax deductions, baby! You could sit on your couch, watch tv, and do your small business bookkeeping and billing...but there’s no tax benefit to that. By creating and maintaining a home office for your small business, you can claim home office deductions that in turn reduce your taxable income at the end of the year. If you have already set up a qualifying home office, start tracking expenses and keeping meticulous records for your income taxes.

Here’s a lengthy, though not comprehensive, list of common home office deductions. Keep in mind these do not include typical business expenses that you would normally deduct whether or not you had a home office.

Tax Deductible Home Office Expenses

Paint
Carpet
Repairs or additions to the structure of the office
To learn about the unlikely deduction a bathroom as a portion of your home office, read this post.
Office decorations
Office furniture including desks, chairs, rugs, lamps, and that fancy painting you just had to have to hang above your desk
A separate business phone line (you cannot deduct a landline used for your home phone calls)
Other home-related expenses or repairs including snow plowing, roof repair, and trash removal. These types of expenses are deductible, according to the square-footage percentage of your home used as a business.
*You cannot deduct expenses for landscaping or lawn care unless you show off your lawn for your business, like if you own a landscaping company.

You can deduct a portion of these expenses, based on the square footage of your home office:

Depreciation
Rent or mortgage
Property Taxes
Home insurance
Utilities (electricity, heating, water, sewer)
Maintenance
General repairs

Home office deductions can be tricky. While claiming a home office is not a red flag for the IRS, you want to be careful and not get overzealous when it comes to deductions. The simplified method can make it easier for you to claim the deduction but might not provide you with biggest deduction.

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FAQ – Can I Claim a Bathroom as Part of My Home Office?

Unfortunately, no. You can’t claim a bathroom as part of your home office, even though you likely take a potty break or two during your work day.

Remember the two most important words when it comes to home offices?

Exclusive and Regular. Even if you mostly use the bathroom closest to your home office while you work, the second you use it as a guest bathroom, for your children, or “off the clock,” it’s not exclusive anymore. In all reality, that’s not happening in most homes. Nine out of 10 times you can’t claim a bathroom as part of your home office.

Take this case study, for example:

“In T.C. Memo. 2011-201, Luis Bulas, Petitioner, v. Commissioner of Internal Revenue, Respondent, Docket No. 18977-09, U.S. Tax Court Judge Haines agreed with the IRS that taxpayer Luis Bulas was not entitled to a deduction for his use of the bathroom as a home office expense.

Bulas, a Florida taxpayer, knows a little something about the tax system. He has a master’s degree in accounting from Florida International University. Even better, he worked for the IRS for seven years as a tax technician, revenue agent, Appeals auditor, and Appeals officer, prior to starting his own tax agency. So, yes, for a long while, he was the guy who helped make decisions about whether a taxpayer was complying with the tax laws (cue music).

Bulas also happens to be a father of two daughters, one in high school and one in college, that helped him out with the business from time to time. This is only relevant because he claimed that he paid wages to his daughters and yet managed not to issue any forms 1099 or forms W-2 to them, a fact that also came up as part of his examination.

But, yawn. That’s kind of run of the mill boring stuff. Let’s get to the potty humor.

Bulas was flush enough (wince, I know, terrible pun) to have a personal residence which included a house, a garage, and a guesthouse. The total amount of space worked out to about 2,677.34 square feet.

Like many professionals, Bulas used one of the rooms in his home – in this case, a spare bedroom – as his office space. The total amount of the space for the bedroom was 226.3 square feet. Bulas eventually put an additional bathroom in his home, ostensibly for his clients’ use.

The IRS issued Bulas a notice of deficiency, denying the deductions for the wages paid to his daughters and the business use of his residence. Bulas, of course, appealed, which is how the case made it to Tax Court.

Bulas claimed that he used one of the bedrooms in his house exclusively for his office. Um, okay. That seems reasonable.

Bulas also argued, however, that he used the hallway – wait, he’s losing me here – and the bathroom exclusively for his accounting business. He went on to testify that his children and personal guests also used the bathroom.

The IRS was willing to grant him the use of the bedroom. The bedroom was, as mentioned earlier, about 226.3 square feet, which worked out to about 8.45% of the total square feet associated with Bulas’ residence. That means that he was entitled to pro-rate his allocable expenses and take 8.45% as a business deduction. No more. Bulas could not offer proof that the personal use of the hallway and bathroom met any exception under section 280A(c) of the Tax Code and thus, the personal use of the space trumped the business use. The result? He lost the deduction.”

Even though a regular office has a bathroom (let’s hope anyway!) you can’t claim one on your home office. There are, however, a plethora of other deductions available when claiming a home office. Capitalize on those and let go of that extra 100 sq ft you thought you might be able to claim this year.

Resources

Day: October 6, 2015

FAQ – What Qualifies as a Home Office?

FAQ – What Home Office Expenses are Tax Deductible?

FAQ – What Home Office Expenses are Tax Deductible?

Interested in Learning More?

FAQ – Can I Claim a Bathroom as Part of My Home Office?

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