Home Office Deductions: Home or Office, or Both?

Photo by John Donkin Architect Inc. - Discover home office design inspiration

Are you one of the many small business owners working from home, with no physical office outside of the desk or room in their house. The use of one's home space for an office is low hanging fruit for a tax deduction, but with two different ways to calculate things some people just say,"forget it, it's not worth my time." For the small business owner I say,

​ "Stop leaving money on the table." ​

​My husband and I both work from home, and each utilize space in our home for the activities of our business, including our office spaces. In addition, we have a short-term rental apartment in our basement. So there are various business uses happening in our home. Below is a quick list of key action items we utilize to take advantage of what the IRS calls "Business Use of Home."

Key Action Items
1. Download the most recent copy of the IRS publication 587.
2. Determine if your space qualifies for a deduction, referencing figure A from the publication
3. Figure out the deduction
4. Make sure to keep accurate records
5. Seek help from a qualified tax professional if needed

Number 1 is easy, just click on the link above, or put IRS Pub 587  into your favorite search engine.

Number 2 is a bit more complicated depending on how you use the space. So be sure to reference the information in IRS publication 587, or touch base with your tax professional. Home offices, in-home day cares, and rentals are just a few of the variations in business use of home. So you want to be sure that your use qualifies and if so what specific instructions to follow when filling out any IRS forms. 

Number 3 is fairly straight forward. You can use either the simplified method worksheet found on page 21 of the IRS publication 587 or the expense method worksheet found on page 20 of IRS publication 587. Below are a few personal tips that might help with the worksheet on page 20. 

First I go to my county assessors website and download a copy of what they say the square footage of my house is, note that number down, and put a copy of the assessors site info with my worksheet. While many people may think their home is larger or that addition was permitted, etc.. it is safer to use official county records and any other official substantiating documentation (permit office documents for that new addition, etc.) to make sure you start with the appropriate square footage.

Then I take out a tape-measure and measure my office physical space, noting it down on a piece of paper with a short description of the room (i.e. office near back of house with corner windows). Then I calculate the square footage of my office by taking the length times the width and write that down on the paper with the description. After that I take the square footage of the office and divide it by the square footage of the overall house to get the number that I will multiply all my qualified expenses by. All three data points go into the worksheet and then I reference my bookkeeping for my qualifying expenses. 

So what qualifies as an expense you ask. Best to see the IRS publication 587, lines 5-21 for a detailed list. But for reference, there are direct, indirect, and unrelated expenses. Direct expenses are those that are only for the business part of your home (painting or repairs only in your business area). Indirect are those expense for keeping up and running your entire home (insurance, utilities, and general repairs). And finally, unrelated expenses are those that are only for the parts of your home not used for business (lawn care, painting a room not in use for business). All of them are subject to deduction limits, so be sure to read the IRS publication 587 carefully or double check with your tax professional. 

Number 4 is often the most overlooked step. You must have records to substantiate your deductions or you may run into issues with the IRS down the road. Like I mentioned above, I put a copy of my county assessors documents stating the square footage with my copy of the worksheet. I also make sure that I scan and attach all my receipts for auditing purposes in my bookkeeping software or scan them into a digital folder for the tax year. From scans to paper, having a practice of saving receipts in a folder marked for the corresponding tax year is essential to good record retention (i.e."2019 Tax Receipts").

Last but not least, number 5 is crucial when dealing with interpretation of tax forms. If you're unsure, call a tax professional. Most tax professionals are excited to help you find every deduction they can, they just need you to speak up and ask questions to help them know that you have business use of your home. 

If you are a nonprofit looking for bookkeeping that makes your IRS 990 or IRS 1120 prep easier or a small business looking for bookkeeping services that make your tax prep easier, contact me! cmweaver [at] cwbookkeepingservice [dot] com or 865-951-7407.