Since the late nineties, the number of people working from home across the country has soared, fueled by rising office rental rates, worsening traffic conditions, and better connectivity everywhere. Countless entrepreneurs and small business owners find that working from home is convenient, less expensive and helps them devote more time and resources to growing the business.
Working from home also comes with tax advantages.
More than 20 years ago, the IRS tweaked the rules associated with the home office deduction, making it easier for work-from-home businesses to qualify for tax write-offs. Still, experts advise taking the deduction with care, because it is only intended for those who meet certain criteria.
According to TurboTax, the biggest hurdle a business owner must clear is the “exclusive use” test. Sitting at a kitchen table to run your business isn’t good enough to claim a home office deduction, nor is bringing home extra work at night or on weekends from your regular, offsite employer. You have to establish that a part of your house is your principal place of business, and that it’s a space used exclusively for business purposes.
According to the IRS, you have to meet at least one of these criteria when filing for 2018:
· The space is your main place of business. It’s where you conduct business most of the time during a given week. It’s the place where you manage and conduct your affairs and keep your records;
· It’s the place where you meet your clients or potential clients;
· It’s a separate structure unattached to the house, such as a garage or freestanding office.
So how does the home office deduction work? IRS rules say it’s based on what percentage of your home’s total square footage your office space occupies. This percentage is then used to calculate the commensurate percentage of overhead costs, including utilities, homeowners insurance, homeowners association fees, security system fees and general repairs and maintenance. In 2013, the IRS began using a simplified option for claiming the deduction. It provides a standard cost per square foot and a maximum square foot per office. In 2018, this option is $5 per square foot with a 300-square foot maximum.
Another factor to consider when claiming your home office deduction is whether you rent or own your home. If you rent, you can deduct a percentage of your rent, based on the square footage formula referenced above. If you own your home, you can depreciate the part of your home used for your business. However, if you eventually sell your home at a profit, you’ll have to pay capital gains tax on those depreciation deductions.
Finally, it’s important to know that business owners can’t deduct more in-home office write-offs than the income they make from the home-based business itself.
The 2018 home office deduction is there to support small and emerging businesses, as well as established entrepreneurs who prefer to work from home. Speak with your tax advisor about the best way to make this deduction work for you, and the changes to deduction criteria for 2019.