Who can claim HOME OFFICE DEDUCTION and what amount?

Strating from pandemic months, many taxpayers shifted their workplace and started working from home. Others quit their employment to launch their own companies or begin freelancing on the side, at which point they moved their operations into a home office that they had previously established.  

Some people who work from home are qualified to obtain a tax deduction for the expenses associated with their home office, but the majority of people who work from home are not eligible for this break.  

Home office expenses dependent on whether taxpayers work for a company or are self-employed, as well as whether taxpayer has a specific area of his/her home set aside as an office where he / she doesn't engage in any other activities. 

Unfortunately, taxpayers cannot take advantage of the tax break for a home office if the taxpayer is an employee working remotely rather than the owner of his/her own business (however some states do allow this tax deduction for employees). Employees were able to deduct unreimbursed employee business expenditures, including the home office deduction, prior to the Tax Cuts and Jobs Act (TCJA) being approved in 2017. Nevertheless, beginning with the tax year 2018 and continuing through the tax year 2025, these deductions for employee business costs will not be allowed. 

Mainly there are two tests one should fulfill to claim the home office deduction. These are (1) exclusive and regular use (2) principal places of business.  

Exclusive and regular use 

A taxpayer is required to use a section of his / her home, apartment, condominium, mobile home, boat, or another structure that is analogous to this one for the purposes of his / her business on a consistent and exclusive basis.  

The requirement that taxpayers must utilize a section of taxpayer house exclusively and consistently for business is the primary obstacle that must be overcome in order to qualify for these deductions. 

The exclusive-use condition is taken very seriously by the IRS, which is consistent with the interpretation of the statute.  

Example, consider that taxpayers have dedicated a space in his / her house to the operation of a full-time business, and that taxpayer spends ten hours per day, every day of the week, working there. If taxpayer break the exclusive-use provision by allowing his / her children to use the office to complete their homework, taxpayer will lose the opportunity to take deductions for a home office on his / her taxes. 

Exception to exclusive use 

• The day care center and the storage facility are two examples of exceptions to this guideline. 

Principal places of business. 

The taxpayer home should serve as the primary site of taxpayer's business or taxpayer's home office should serve as a place where taxpayer often meet with customers or clients.  

In addition to achieving the requirements for exclusive use and regular usage, taxpayer home office must also meet one of the following criteria: 

• it must be either the primary site of that firm or 

• a place where regular meetings with customers or clients takes place. 

 A taxpayer is exempt from either the principal-place-of-business test or the deal-with-clients test if the taxpayer's home office is located in a facility that is isolated from the rest of his / her house and stands on its own. For example, a detached garage that has been converted into an office. Taxpayer can be eligible for write-offs for his / her home-based business provided taxpayer can demonstrate that he / she meet both the exclusive-use and the regular-use requirements. 

Home office business deductions can be determined using either (1) actual method or (2) simplified method. 

According to the actual method, direct business expenses are assigned directly to the business, while indirect business expenses are assigned to the home office according to a certain allocation method, such as square footage or number of rooms. 

Simplified method makes use of a prescribed rate, which is then multiplied by the maximum square footage that can be occupied by the home. The prescribed rate for the year 2022 is $5 per square foot, with a maximum of 300 square feet per application. 

If the taxpayer intends to take home office expenses based on the actual method, then the taxpayer is required to file form 8829. However, if the taxpayer intends to take home office expenses based on the simplified method, then the taxpayer is only required to fill out line 30 of schedule C. 

The Simplified Method really simplifies many calculations just like its name suggests.  

• The taxpayer does not need to calculate depreciation for their home if they use the Simplified Method. 

• At the time of selling the use of the property, there is no need to consider depreciation recapture. 

• A taxpayer does not need to differentiate between personal and business use of his or her home in order to take advantage of itemized deductions for mortgage interest, real property taxes, and casualty losses related to his or her property.