Home Office Deductions
Taxpayers who have “paperwork only” home offices, but do their income-producing work elsewhere, can claim home office deductions starting in 1999. A taxpayer can claim the deduction if the home office is used for administrative or management work and there is no other fixed location where a substantial amount of administrative or management work is performed.
Starting in 1999, a taxpayer’s home office qualifies as a principal place of business if (1) the office is used for business connected administrative or management work and (2) there is no other fixed location where the client conducts substantial administrative or management work. If a taxpayer does administrative work in their car or in a hotel room in addition to the home office, that will not spoil their deduction because they are not considered fixed locations. A home office can still qualify as a principal place of business even though there is another fixed location available that is not used; this must be for the convenience of the employer rule.
BONUS: The IRS has also tied deductions for commuting trips away from home offices into the principal place of business definition. Therefore, the law allows extra commuting deductions. It’s long been the rule that taxpayers cannot deduct the cost of going from home to the office (nondeductible commuting expense). REV. RUL. 94-47 states that if a taxpayer could write off the cost of the trip from their home office if, and only if, the home office was the “principal place of business. Therefore, starting in 1999, if a taxpayer’s home office qualifies as a principal place of business they will also get a deduction for auto expenses from that starting point.
TYPES OF EXPENSES THAT ARE DEDUCTIBLE WITH HOME OFFICES
If you are eligible, you can write off the expenses directly connected to your home office such as: additional cost of home & liability insurance because it is a home office, repairs & any improvements related to that space, utilities for gas & electric if there are separate meters for that space.
The indirect expenses are expenses that benefit the entire house to which you deduct a portion that corresponds to the area you are using. These indirect expenses consist of such items as depreciation, utilities, insurance.
To determine the deductible portion of the indirect expenses, you must figure out how much of the home is used as an office. There are 2 ways to do this: number of rooms in the home or square footage. For example, if the home has eight rooms, all approximately the same size, the deduction would be 12.5% of the indirect expenses. If the home is 2,000 square feet and the office takes up 200 square feet, 10% of the indirect expenses can be deducted. You can use the method that results in the biggest deduction.