by Evie Alvarez
This deduction is available to employees and business owners who have a space in their home that is regularly and exclusively used for business. Most expenses will be allotted according the percentage of the home which is used for business. Sole-proprietors and single-member LLCs, will report this as an expense on Schedule C. Employees will report this on Schedule A as an Unreimbursed Employee Expense. For employees, the amount of the deduction is the excess of 2% of gross income.
Regularly and exclusively. Regularly and exclusively. You got that? Great!
Now, what does that mean? Any space in your home for which you are claiming business use of home must be regularly and exclusively used for business.
Let’s work through a few examples together and you can tell me whether it is REGULARLY and EXCLUSIVELY used for business.
- The kitchen table? Not likely. You probably have to push your piles of papers aside in order to fit your plate of pizza on the wood.
- A room set aside as an office? Possibly. If it looks like an office, then it should qualify. If it has a large bed that your mother-in-law sleeps on when she visits (every other weekend), it may be crossing the line when it comes to exclusivity. However, you may still be able to use the area of the room that is exclusively used for business.
- The coffee table in your living room where you sit and type on your laptop? Probably not. Again, that darned exclusivity test!
- The desk in your bedroom which you use to work from home twice a week? Sorry, but no. That’s not regular, so this doesn’t qualify as your principal place of business.
Now, of course, this wouldn’t be the Internal Revenue Code if there weren’t a few exceptions to the rule.
For the exclusivity test, there are exceptions if you use part of your home for storing inventory or product samples, or if you use part of your home as a daycare facility. These exceptions are somewhat beyond the scope of this blog, however.
Claiming the Deduction
Information you’ll need to know in order to claim the deduction:
- Area (square footage) of your home
- Area (square footage) of the space you use regularly and exclusively for business
- Length of time used for business (full- or partial-year)
- Direct Expenses: Those expenses which are only for the business part of the home. Examples include: painting or repairing the business room.
- Indirect Expenses: The expenses for keeping up and running the entire home. Examples include: insurance, utilities, general repairs, etc.
Direct expenses are fully deductible while the deductibility of indirect expenses is figured using the percentage of the home used for business.
Area of office room: 50 square feet
Area of home: 2000 square feet
Percentage used for business: 3%
Cost of painting office: $100
Cost of utilities: $3,000
Deductible amount: $100 + 3% of $3,000 = $190
There is also an opportunity to take depreciation on your home, if you own your home. Land is never depreciable. Depreciation is a topic for another day, so I’ll just let you know that you can take depreciation on your home if you have qualified business use.
Now, whether you’re an employee or a business owner, the guidelines for claiming Business Use of Home is the same. The difference is where that information then goes onto your return.
Sole-Proprietor or Single-Member LLC
You’ll need to fill out form 8829, which will then flow through your Schedule C as an expense. This amount will either lower your profit or increase your loss, which will then affect your gross income to be taxed. Awesome! Lowered profit = lower taxes.
This will come through your 1040 Schedule A, Unreimbursed Employee Expenses. Of course, as the name implies, if your employer reimburses you for these expenses, you will not be able to claim them on your tax return. The Schedule A is where you document your itemized deductions. Now, here’s the catch which lowers the overall effect of this deduction on your return. Only the excess of 2% of your gross income is actually deducted to determine your taxable income. (I’m assuming that your overall, itemized deductions are greater than the standard deduction. If the standard deduction is greater, the unreimbursed employee expenses won’t help you.)
So, taking our example from above into consideration, if I had gross income of $9,000, I’d only be able to deduct $10, since 2% of $9,000 is $180 and my overall expense is $190. If I’m in the 15% tax bracket and only taking into consideration this deduction, my overall tax would change from $1,350 (15% of $9,000) to $1,348.50 (15% of $8,990). Yep, that’s a whopping buck and a half. But, since we round to the whole dollar…only $1.
You may ask why I chose to use gross income of $9,000. That’s rather low. I totally recognize that and realize the limitations of my example. So, why $9,000? If I chose $10,000, you’d get absolutely no deduction WHATSOEVER. 2% of $10,000 is $200. Only the amount over $200 is deductible and our total was $190.
Now, of course, your circumstances will be different, but this does show you how this generous deduction really flows through to very little effect upon the amount of taxes you actually owe if you are an employee. If you own your own business, the net effect will be greater since you don’t have to worry about it being the excess of 2%.
I hope all of this confusing rambling has helped you come to appreciate the complexities of the tax code! Hopefully, it has also helped to give you some understanding of how your tax is determined so that you can make the most of the deductions available to you.