The 2020 home office deductions apply to both homeowners and renters, regardless of what type of home you live in (excluding hotels or temporary lodging.) Additionally, freestanding structures such as garages or studio spaces qualify as long as it meets one of the following requirements.
Regular & exclusive use requires that the area you’re operating in for business must be used exclusively for business. Translation: if your space doubles as a guest bedroom, it doesn’t fit the requirement. The IRS makes exceptions for licensed daycare spaces or storage for inventory.
Principal place of business requires that part of your home be used as your principal place of business. This doesn’t require your home to be the space where you meet clients. However, you must use it exclusively for “administrative or management activities.” According to the IRS, you must not have any other location where you also conduct a substantial amount of “administrative or management activities.”
Separate spaces or separately identifiable spaces are eligible to qualify for the home office deduction. This means it doesn’t have to be a full room (or divided) but rather a dedicated workspace of some kind. For example, creating a workspace on the right side of your living area could qualify as long as it’s solely used as a workspace.
Another satisfying component of home office reduction is taking advantage of the other expenses you can package in along the way. After determining the space you’re eligible to use (more on this below), you can include costs on home depreciation, property taxes, homeowner’s insurance, and business percentage of deductible mortgage interest.
Up to 15% of your annual utility bill is deductible only if your office space occupied 15% of your home.
In researching home office deductions, you may have come across two options for calculating expenses: the standard method and the simplified method. This decision largely depends on what would result in the larger taxable deduction.
The standard method allows you to deduct the full cost of direct expenses to the office space. In contrast, indirect expenses are only accounted for based on the percentage of your home used for business. This method is more sophisticated but could net a higher deduction depending on your business or circumstances.
In summation, the simplified method can work well for single-room offices and small operations. The actual-expenses method might work better if the business makes up a large part of the home.
The varying rules around home office deductions can be nuanced, but worth the effort in conserving your cost in a particularly changing climate. Keep detailed records of expenses, repairs, or purchases to prepare for any potential audits. If you’re a business owner or self-employed individual working from home, we would advise to speak with your tax advisor before claiming any tax credit or deduction as this is not an all-encompassing list of rules around home office deductions. If you do not have a tax advisor, feel free to book an appointment with us today.