This month, you will receive paperwork documenting your 2018 income, as well as paperwork from those who paid you interest and from those you paid. You’ve also corralled receipts to document your deductions, right?
But before you sit down to take care of business, make sure you understand one key way to reduce your tax bill: the home office deduction. Here’s what you need to know.
1. Is it exclusive space?
A home office deduction is a great way to make normally nondeductible expenses like rent and utilities partially deductible. But simply doing some work at the dining room table isn’t enough to qualify. You must use part of your home as your principal place of business, and use it exclusively for that purpose.
According to the IRS:
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.
That sounds straightforward, but it’s less so than it seems. For example, when the IRS says “exclusively,” it means:
- The space can be as small as a desk or as big as a room. There’s no size requirement, and there don’t have to be walls or partitions marking it off. It just has to be a “separately identifiable space” and used exclusively for business.
- The space you want to deduct expenses for can’t be used for personal purposes. The couch you watch TV on doesn’t count. And even if you do all of your accounting in the dining room, eating there nixes the deduction.
2. Is it the ‘principal place’?
The other major tricky term is “principal.” It’s OK to have more than one place of business and claim the deduction. But you can only claim the home office if it’s where you do the majority of the work, or certain kinds of work. The IRS further explains the rules as follows:
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.
3. Figuring the deduction
Before you begin, you’ll need to know the total square footage of your office space and home, because you’ll be deducting the percentage of home-related expenses the business uses.
So, if you have a 2,000-square-foot home and use a 200-square-foot spare bedroom as a home office, you’ll deduct up to 10 percent of the rent or mortgage payments, utilities, insurance and so on. Stuff that’s only for the business area, like paint, can also be fully deducted.