Updated April 25, 2022
Working from home is a luxury many small business owners and freelancers enjoy. Moreover, the ability to claim deductions when using a home is an added perk. However, there are rules to abide by as laid out by the IRS. Section 280A(c)) concerns the rules governing the home office deduction, mainly to prevent taxpayers from claiming personal expenses (generally nondeductible) as business related to write them off.
While determining the actual deduction calculations and values can be time-consuming, here are some of the major Section 280A requirements to be aware of when approaching the home office deduction:
Regular and Exclusive Use – You are required to use a part of your residence as a particular business-only space, meaning that’s the only thing that happens in there. For example, if you have a spare bedroom or study that you conduct your business out of and don’t use it for anything else then theoretically you can take a deduction for that room alone.
Principal Business Location – You need to prove that you use your home as your business’ primary location. If you conduct business at another location but still use the home for a significant amount of related activity regularly, then it is still possible to qualify for the deduction. For example, if you use a home space to conduct in-person meetings with clients while handling all other work at another spot, it’s possible to deduct those home meeting expenses.
In general, home office deductions are determined by the percentage of residential space used for business affairs. If you only use a particular room, or part of, in your work, then you need to figure out how much space in relation to your overall home is committed to the business.
The rules above apply mostly to business owners; however, if you are an employee and work from home, you may be able to receive tax-free reimbursement from your employer. However, you need to meet the qualifications listed above as well as some additional ones:
- The business usage has to be for your employer’s convenience
- You can’t rent any home space to your employer and then use said leased space to perform work for that employer as an employee
In short, using the home office deduction is an excellent way to save money on your tax return, but you need to be careful and abide by Section 280A because the IRS will always look closely to make sure you aren’t cheating in any way. That’s why it’s best to have a tax professional assist you with such a filing and make sure you have all bases covered before making the claim. The team at Anderson has staff knowledgeable in such matters and can provide that information to you.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, a great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets.
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