Home Office Deductions: 101

May 19, 2013 - 2 minutes read

Historically, home office deductions on individual income tax returns have been a popular focus of IRS audits.  This shouldn’t dissuade you from taking a legitimate home office deduction on your tax return, but make sure you follow the rules when doing so.  As with most tax law, these rules can be complex.

Generally, you must establish that your home office is used “exclusively and regularly” for business.  Robert Wood explains why your bathroom, for instance, probably won’t meet this test:http://www.forbes.com/sites/robertwood/2011/08/22/is-your-bathroom-your-home-office/

However, if you have a room in your house that is used exclusively and regularly for business, measure the square footage of this room.  Divide it by the total square footage of your house.  The resulting percentage is the amount of your home mortgage interest, real estate taxes, home owner’s insurance, utilities, etc. that can be claimed as a home office deduction.  Also, you can deduct 100% of repairs and other expenses that relate directly to your home office.

Additional items to note:

  • Form 8829 is used to calculate your home office deduction if you are self-employed.
  • Form 2106 is used by employees to claim a home office deduction.
  • Your home office deduction is limited to your net income from the related business.
  • You must retain records supporting your home office expenses.
  • If you ever sell your home, any gain up to the amount of depreciation you deducted in relation to your home office is taxable.  In other words, 100% of your gain from the sale of your principal residence may NOT be eligible for exclusion.

Ready to file your business? There are many ways to set up your business structure and build your home-based business from the ground up.