The Real Story of the Home Office Credit

There are a number of ways to optimize the write-off, ensure that you maintain good standing with the IRS, and save the most possible on taxes. So I am going to give you the real story of the home office credit.

It makes sense that there is more interest than ever in the Home Office Deduction. The "great formation" followed the "great resignation." More Americans than ever run a full-time company out of their home office, along with a side gig or two!

A recent Stanford study estimates that over 47% of full-time employees currently work from home. Furthermore, nearly twice as many workers do their work from home as they do in the office.

Millions of Americans are therefore curious as to whether the "wear and tear" on their furniture, refrigerator, and floors may qualify for a tax deduction in all of this.

Good News and Bad News about Home Office Deductions 

Bad News about The Real Story of the Home Office Credit

First, the unfavorable information. You will not be eligible for a write-off if you are an employee without a small business or side gig.

"Unreimbursed employee expenses" are no longer deductible under current U.S. tax law. That example, if you are required to work from home and are compensated as an employee using a W-2. The expense of you sharing your household goods, furnishings, or space is not deductible. I apologize. But there are choices. Please continue reading.

Good News about The Real Story of the Home Office Credit

If you can convince your employer to support it, and IF they do pay you back for the "expense" of using your lovely house as a new corporate office. Most of the time, those reimbursements are tax-free. If not, the business receives a tax deduction. It is not necessary for you, the employee, to include the income on your W-2.

On the other hand, the monies may become rental revenue if any of them surpass a reasonable "cost" reimbursement. It might even be a part of your W-2 (we would prefer to stay away from both of those situations). Make sure you discuss the options about the amount and appropriate classification with your employer.

Great News for a Home Office Deduction

The good news is that you probably qualify for the home office deduction if you own any kind of small business, making it the best option.

To be more specific, I WANT and WILL encourage you to claim the home office deduction. If nothing else, it will serve as a deduction for your side business, rental property operation, or any potential 1099 income.

Yes, that is correct! I need and desire for you to have a side business or gig in your life. This provides access to a number of potent write-offs, such as the cherished home office deduction.

You probably already have a side gig of some kind, even if you're not aware of it. This could be anything from operating a service company, selling products online, driving for Uber, to doing part-time consulting.

Yes, once more, a "side gig" or "side hustle" with a 1099-NEC of any kind is equivalent to a "small business." I want you to accept this because it means we can now discuss the home office deduction!

Busting the Myth That It's a Dangerous Inference

In summary, if done correctly, taking the home office deduction is not risky at all!

Remember that before I go over the requirements and your choices for deducting the home office. I'm tired of hearing from prospective customers and former pupils that their personal accountant is "afraid" that they could be audited. As a result, they advise their clients against taking the deduction and cite its "high risk." That isn't true at all.

Take it, as long as you have the right to it! However, it's true—avoid becoming overly aggressive or greedy. Make sure you apply the appropriate approach or plan that suits your circumstances the best. When you are legally able to deduct something, you should do so without hesitation, even if you are being audited.

Another Reason to take the Home Office Deduction – Your Auto!

Another amazing justification for even a conservative home office deduction is that it makes a fantastic auto deduction possible!

Consider it. Miles driven for personal use of your car and for commuting to and from work are not deductible. But if your side gig (or small business) has a "home office" (regardless of size), you can now rationalize deducting A LOT more auto mileage when you leave the house office to work on your side gig.

FIRST: Two Requirements to Claim the Home Office Deduction

You want to be sure that you "can" before discussing "how" you take the deduction. Your home must meet two fundamental requirements in order to be eligible for a deduction. Both of them must be met:

Regular and Exclusive Use

The IRS finds most of its leverage in this test, which is also the hardest to pass. The technical rule comes first: A portion of your house must be regularly used only for business purposes if you are a taxpayer or business owner. I understand that the word "exclusively" might worry you. A lot of people don't have a room that they use just for business. It's likely that you'll enter the room at night in your undies, eat cereal, watch a movie, or send your grandmother an email. There are two exclusions, though, that might still allow taxpayers to pass the exclusivity test.

1. Deminimize use

2. Small Home

Principal Place of Your Business

Of the two parts of the test, this one is now the easier to pass. This used to be a significant requirement because, in most cases, you couldn't work from home if you had "another office" in the city. This was due to the fact that the "other" office served as your "principal" place of business. Even though you also conduct business at another location, you can deduct your expenses for the portion of your home that is used exclusively and frequently for business if you hold in-person meetings with patients, clients, or customers in the course of your regular business. The Commissioner v. Soliman case, however, was the major turning point for taxpayers.

SECOND: Two (2) Options to Calculate the Home Office Deduction

Deductions for a home office typically depend on the portion of your house that is used for business purposes. Determine the percentage of your home that is dedicated to business activities if you conduct business out of a room or a portion of a room. But now the IRS has devised an alternative method to finish the real "calculation."

1. Simplified Option

By enabling a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office rather than figuring out actual expenses, the simplified option can drastically lessen the recordkeeping burden. (As opposed to the Standard Approach; see below). This relatively new (as of 2014) option has multiple main advantages:

• For the portion of their home used for business, business owners are eligible to deduct $5 per square foot, up to a maximum of 300 square feet.

• With this approach, business owners can continue to deduct their property taxes and mortgage interest on Schedule A without having to give a portion of the deduction to the Home Office Write-off

• Recapture of home office depreciation upon selling your primary residence is not mandatory

2. Regular Option

If the business owner has a more expensive home, a larger square footage, or a home office design, this is a better choice. Therefore, it's crucial to take advantage of the larger write-off rather than choosing the easier option. But it also requires math and keeping of records. The things to think about are as follows:

• The percentage of your house used for business purposes multiplied by maintenance costs is the basis for deductions for a home office.

• Mortgage interest, insurance, utilities, repairs, and depreciation are all considered allowable expenses.

• To maximize the Home Office write-off, you will be pilfering deductions from your itemized Schedule A, but given the new limits on mortgage interest and property taxes, that might not be a bad thing. View "The New Home Mortgage Interest Deduction," one of my articles.

• If you ever decide to sell your house, you will need to recoup the depreciation you took on the home office.

• Additionally, remember to maintain records to support the costs you are incurring.

S-Corporations

For those of you who are S-Corporations, industry standard procedure is to figure out a reasonable "reimbursement" amount for home offices and deduct rent from your S-Corp tax return. You receive the reimbursement tax-free, and the S-Corp clearly deducts the rent from taxes. But a few crucial points or prerequisites:

• Verify that the write-off amount is not inflated. It would match the amount taken with the home office worksheet for a sole proprietorship exactly, or nearly so.

• Think about classifying the expense as "office expense" on the 1120S. We don't want this to happen, so if you put it on the "rent" line, the IRS (computer system or auditor) might search for the rent to be claimed on the personal 1040. It is in fact a "reimbursement," free of taxes for the individual and tax deductible for the S-Corp.

• Having a "Accountable Plan" outlined in your S-Corp's annual minutes is also essential. When an expense benefits employees and/or owners, the IRS mandates the creation of a "accountable plan" for this and other expenses.

• This is an excellent method to claim the deduction in a much less noticeable way and further lower your chances of an IRS investigation if you are concerned about "audit risk."

Avoid Being too Clever

You believe that taking all of these business deductions is irrelevant. Perhaps you're thinking, "I'll just take this money 'under the table.'" Not a wise move. The IRS might come after you. Additionally, you WANT to claim the income in order to improve your overall financial situation.

Your tax return's additional "net" income may be used to finance retirement accounts, get you a mortgage to buy a house, or even improve the terms of your existing mortgage.And remember: Additional tax write-offs!

In summary, owning a small business makes it easier to both create and realize the American Dream. Furthermore, the deduction for a home office makes up a very small portion of the total. Speak with your CPA and insist on taking a firm stance on this deduction. Don't let fear stop you from taking it; only turn it down if it's obvious that you don't qualify.

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