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Requirements to Claim the Home Office Deduction

There are two basic requirements for your home to qualify for a deduction:

1. Regular and Exclusive Use. You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.

2. Principal Place of Your Business.  You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may still qualify for a home office deduction. For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business. You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.

Additional tests for employee use. If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. You must meet the tests discussed above plus:

• Your business use must be for the convenience of your employer, and
• You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.

If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.

Computing The Home Office Deduction

There are Two methods for determining the amount of the home office deduction.  Under the regular method (the only method available for tax years 2012 and prior) taxpayers (you) must determine the actual expenses of the home office. These expenses may include rent, mortgage interest, insurance, utilities, repairs, and depreciation.  The amount of these expenses that are deductible as home office expenses are generally based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.  If you have a 100 square foot office in a 1,000 square foot house you may be able to claim 10% of these expenses a business deduction.  


New for this year (2013 tax returns) the IRS has authorized a simplified method for computing the business use of your home (IRS Revenue Procedure 2013-13, January 15, 2013). This new simplified option can significantly reduce the record keeping burden by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses.  For 2013 this rate is $5.00 per square foot with a maximum of 300 square feet.  Additionally, under the simplified method mortgage interest and property taxes do not need to be allocated between itemized deductions and the home office deduction.  These otherwise allowable deductions are deductible in full on schedule A.  Depreciation is not claimed under this method.  This can be a plus as there are no issues of depreciation recapture when you sell your home.  Under the regular method you may be required to include prior depreciation deductions in your income for the year you sell your home.

The home office deduction is subject to certain limitations and complexities which are beyond the scope of this discussion.

Some tax practitioners feel that it is better not to claim a deduction for an office in the home. There are several reasons for this thinking.  A home office deduction, under certain circumstances, can invite more scrutiny to your tax return.  This is especially true if you are an employee claiming the expense on form 2106 Employee Business Expenses. 
 
The home office deduction also generally involves depreciation of a portion of your home. This depreciation will have to be recaptured when you sell your home. Normally the entire gain from the sale of your home will be excluded from tax if you have met the time requirements.  However, if you have claimed any depreciation in prior years you will have to report it as income in the year of sale and pay tax on it.

Another reason that tax preparers may overlook the home office deduction is that much of the expense is already deductible on schedule A under the mortgage interest and property tax headings.  Because of this, there may be a feeling that the only thing gained is a small percentage of the utilities and of course that depreciation that you will eventually recapture.

Now that we have listed some of the seemingly negative side of the home office deduction it's time to take a look at the benefits.  Yes, its true that the mortgage interest and property taxes are already being deducted on Schedule A; however, if you can shift that deduction from an itemized deduction that only offsets your regular income tax to a business deduction that offsets both regular income taxes and self employment tax you will be ahead of the game by 15.3%.  That is the tax rate that self employed individuals pay for Social Security and Medicare taxes.

Renters really benefit from this deduction.  Through the home office deduction, qualified taxpayers are able to turn a percentage of an otherwise non deductible expense - rent and utilities- into a tax deduction!

One really important benefit arising from the home office deduction is the impact it has on business auto deductions.  If you have a qualified home office that first business trip away from the home in the morning is deductible business mileage.  Where no home office exists, that first trip is non deductible commuting!

As to that issue of recapturing the depreciation, the IRS has implemented a new simplified home office deduction method that eliminates the depreciation component of this deduction.  Under this method a qualified taxpayer can take a deduction of $5 per square foot not to exceed 300 square feet.  (You can read more about this in future posts).

Each individual must weigh the facts and the risks for themselves but on the whole, if you are entitled to a deduction and have positive business income to offset this can be a very valuable deduction and should not be overlooked.

A change in name can have an impact on your income tax filing.  The IRS matches names and social security numbers with the Social Security Administration's records.  If the name you report on your return does not match what SSA has on file it can cause your electronically filed return to reject. With a paper filed return you are likely to receive a letter from the IRS about the mismatch.  If you are expecting a refund this may delay when you receive it.

Report Name Change before You File Taxes

Did you change your name last year? Did your dependent have a name change? If the answer to either question is yes, be sure to notify the Social Security Administration before you file your tax return with the IRS.

Be sure to contact SSA if:

• You got married or divorced and you changed your name.
• A dependent you claim had a name change. For example, this would apply if you adopted a child and that child’s last name changed.

File Form SS-5, Application for a Social Security Card, with the SSA to let them know about a name change. You can get the form on SSA.gov by calling800-772-1213 or at an SSA office.

Many people hire a professional when it’s time to file their tax return. If you pay someone to prepare your federal income tax return, the IRS urges you to choose that person wisely. Even if you don’t prepare your own return, you’re still legally responsible for what is on it.

Here are ten tips to keep in mind when choosing a tax preparer:

1. Check the preparer’s qualifications.  All paid tax preparers are required to have a Preparer Tax Identification Number or PTIN. In addition to making sure they have a PTIN, ask the preparer if they belong to a professional organization and attend continuing education classes. 

2. Check the preparer’s history.  Check with the Better Business Bureau to see if the preparer has a questionable history. Check for disciplinary actions and for the status of their licenses. For certified public accountants, check with the state board of accountancy. For attorneys, check with the state bar association. For enrolled agents, check with the IRS Office of Enrollment.

3. Ask about service fees.  Avoid preparers who base their fee on a percentage of your refund or those who say they can get larger refunds than others can. Always make sure any refund due is sent to you or deposited into your bank account. Taxpayers should not deposit their refund into a preparer’s bank account.

4. Ask to e-file your return.  Make sure your preparer offers IRS e-file. Any paid preparer who prepares and files more than 10 returns for clients generally must file the returns electronically. IRS has safely processed more than 1.2 billion e-filed tax returns.

5. Make sure the preparer is available.  Make sure you’ll be able to contact the tax preparer after you file your return - even after the April 15due date. This may be helpful in the event questions come up about your tax return.

6. Provide records and receipts.  Good preparers will ask to see your records and receipts. They’ll ask you questions to determine your total income, deductions, tax credits and other items. Do not use a preparer who is willing to e-file your return using your last pay stub instead of your Form W-2. This is against IRS e-file rules.

7. Never sign a blank return.  Don’t use a tax preparer that asks you to sign a blank tax form.

8. Review your return before signing.  Before you sign your tax return, review it and ask questions if something is not clear. Make sure you’re comfortable with the accuracy of the return before you sign it.

9. Ensure the preparer signs and includes their PTIN.  Paid preparers must sign returns and include their PTIN as required by law. The preparer must also give you a copy of the return.

10. Report abusive tax preparers to the IRS.  You can report abusive tax preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or changed the return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. You can get these forms at IRS.gov or by calling 800-TAX-FORM (800-829-3676).