Let’s go over some commonly asked questions about the use of a home office.
If you own your own business and do not have office space available in another location, such as a hospital or at your practice, setting up a dedicated home office (HO) can provide you with deductions you would not otherwise be entitled to.
- Q: Can I use a room most of the time, such as a guest bedroom?
- A: No. Your guest bedroom, even if used once a year, cannot qualify as a home office.
- Q: Can I have a HO if I don’t own my home?
- A: Yes. You will allocate a portion of the rent, insurance, and utilities based upon the square footage.
- Q: What expenses qualify for a home office?
- A: All costs of home ownership including depreciation of your house, mortgage, insurance, real estate taxes, repairs & maintenance, and wi-fi. You can also deduct “direct expenses” 100%. Examples are painting your office, buying a rug for your office, and buying a rider on your insurance for your business.
- Q: Should I use the simplified method for deducting my HO?
- A: Unless you are living in a fairly inexpensive house, the simplified method will almost always yield a lower deduction. That is because the simplified method does not account for depreciation. Depending on the size of your office, depreciation can be a significant part of your deduction.
- Q: Does having a home office mean I’ll be able to deduct all of my mileage from home?
- A: Not necessarily, but in many cases it will. According to the IRS, you can deduct mileage driven from your home to work sites if your home is your principal place of business. In other words, if you are a 1099 contractor for one hospital, mileage from your home office to the hospital would not be deductible. However, if you are a consultant for many groups and use your office as a communications hub, to schedule appointments, for administration, and marketing, then I would be comfortable deducting mileage to your clients.
- Q: Should I skip using the HO deduction since I’ll just have to pay it if I sell my house?
- A: This is a common misconception. You should never forego a legitimate deduction. In the event you sell your home, you will simply be repaying the taxes you have already saved. The net result is zero impact to you. But if you never sell your home, you will have lost the opportunity for a nice deduction. In addition, the IRS requires taxpayers to claim depreciation for business assets. It is called the “allowed or allowable” rule. This means that, even if you do not take the deduction, the IRS treats your taxable income as if you did, anyway, the worst of both worlds.
- Q: Does a “dedicated” space have to be a separate room?
- A: Not necessarily, but you do need a clear line of demarcation. For example, dividing your living room between personal and business with a bookcase will allow you to deduct your home office.
- Q: What if I have a home office for my S-corporation?
- A: You will be able to deduct your home office is by establishing an “accountable plan“. This means you (as the employee) submit an “invoice” to your corporation to be paid to you for business expenses you have paid out of pocket. The corporation gets to take the deduction and the payment is not taxable to you!
- Q: Won’t a home office get me audited?
- A: Very unlikely although you should never waste a legitimate deduction based on “what if?” I’ve had one home office deduction in my 39 years as a CPA which resulted in no changes.