Home Office Tax: Itemizing Your Deductions

If you work from home, you may be able to claim a tax deduction for your home office expenses. The home office deduction is a tax break for self-employed people who use part of their home for business activities. This includes renters and homeowners, and can be claimed on any type of home, including a house, apartment, condo, or houseboat.

To qualify for the home office deduction, you must meet one of the following criteria:

- Exclusive and regular use: You must use a portion of your home exclusively and regularly for your business.

- Principal place of business: Your home office must be either the principal location of your business or a place where you regularly meet with customers or clients.

There are two methods to calculate your home office deduction: the simplified method and the actual expense method. The simplified method involves multiplying the square footage of your home office by a prescribed rate, while the actual expense method values your home office by measuring actual expenditures against your overall residence expenses.

Calculating the percentage of your home used for business

To begin, you'll need to measure the length and width of your home office space. If you have a room exclusively dedicated to your work, simply multiply the length by the width to get the area in square feet. If only a portion of the space is used for business, estimate the area of that specific portion.

Next, you'll need to calculate the total square footage of your house. This information should be available in legal documents from your home purchase or rental agreement. It can also be found in county offices or on a county website.

Once you have these numbers, you can calculate the percentage of your home used for business. Divide the square footage of your home office by the total square footage of your house, then multiply by 100 to get the percentage. For example, if your home office is 150 square feet and your house is 1200 square feet, the calculation would be 150 / 1200 * 100, resulting in a percentage of 12.5%.

It's important to note that the IRS has specific requirements for the home office deduction. The space must be used regularly and exclusively for business purposes and should be the principal place from which your business is conducted. Additionally, the deduction is limited by your net business income, and you can't deduct more than your net income.

The simplified square footage method

The simplified method can be used for taxable years beginning on or after January 1, 2013. To use this method, you must meet the qualification requirements for the home office deduction. These include:

• Exclusive use: Your home office must be used exclusively for business purposes. There are limited exceptions for daycare providers and inventory storage.
• Regular use: Using the space occasionally will not meet this criterion.
• Business use: The space must be your principal place of business or used for face-to-face meetings with customers or clients on a regular basis. It does not need to be the only place of business, but there should be no other fixed location where you conduct substantial administrative or management activities.

To determine your home office deduction under the simplified method, multiply the 'allowable square footage' for your home office by 'the prescribed rate'. The allowable square footage is the lesser of:

• The actual square footage of your home office
• The prescribed rate of $5 per square foot (this rate may be updated by the IRS when necessary)

The maximum deduction that can be claimed using this method is $1,500. However, you cannot claim more than your gross income attributable to the business use of your home minus any unrelated business deductions. Any amount disallowed due to the gross income limitation cannot be carried over to offset income in another tax year.

When using the simplified method, you cannot deduct any actual expenses or depreciation for the business use of your home. Additionally, you must still pay taxes on any income earned from the business use of your home.

The actual expense method

To use the actual expense method, you must first calculate the square footage of your home office. For example, if your home office is a 15-foot by 15-foot room, then its total square footage is 225 square feet (15 feet x 15 feet = 225 square feet). Next, find out the square footage of your home. If your home has a total area of 1,600 square feet, then divide the area of your office by the area of your house: 225 / 1,600 = 0.14 (or 14%). This decimal represents the percentage of your total home expenses that can be allocated toward the home office deduction.

After determining the percentage of your household expenses that can be written off, list all of the expenses that pertain to your entire home, such as mortgage interest, real estate taxes, insurance, utilities, and depreciation for the year. These are known as "indirect expenses." Expenses that are incurred solely for the benefit of the office space are then listed as "direct expenses." The indirect expenses are totaled and multiplied by the percentage derived earlier (in this case, 14%). Then, the indirect expenses total is added to the total of the direct expenses.

It's important to keep good records of your expenses when using the actual expense method. You must be able to substantiate all expenses, so be prepared to have detailed records, including receipts and other documentation.

Home office tax deduction rules and considerations

The home office tax deduction is a valuable allowance for those who work from home, but it is important to understand the rules and criteria to qualify. The following paragraphs outline the key considerations for those looking to claim this deduction.

Who Qualifies?

The home office deduction is available to self-employed individuals, including independent contractors, sole proprietors, and freelancers. It is also available to business owners who use part of their home for their business. However, it is important to note that employees who work remotely for an employer are not eligible for this deduction.

Space Exclusively for Business:

The space in your home designated as an office must be used exclusively and regularly for business purposes. This means that if the area is used for both personal and business activities, it does not qualify. The space must also be used regularly, meaning a few times per year is not sufficient. The only exception to this rule is if the space is used for daycare services or inventory storage.

Principal Place of Business:

Your home office must be the principal location of your business, or a place where you regularly meet with clients. Even if you conduct business outside your home, as long as you use your home office for administrative or management tasks and don't have another fixed location for these duties, you can still qualify.

Calculation Methods:

There are two methods to calculate the home office deduction: the standard or regular method, and the simplified option. The standard method involves calculating the percentage of your home used for business and applying it to your total household expenses. The simplified option is a quicker calculation, where you multiply the square footage of your home office by a standard rate of $5 per square foot, with a maximum of 300 square feet.

Expenses:

There are several expenses that can be deducted, including mortgage interest, insurance, utilities, repairs, maintenance, depreciation, and rent. However, it is important to note that deductible expenses cannot exceed the income derived from the business for which the deductions are being claimed.

Record-Keeping:

It is important to maintain good records and documentation to support your home office deduction. This includes expense receipts, cancelled checks, and other records that verify your home office expenses and prove that your home office is your primary workplace.

State-Specific Rules:

While the home office deduction is not allowed for employees on a federal level, some states do allow this deduction for employees. Therefore, it is important to check the rules and regulations for your specific state to understand your eligibility.

How to claim a home office tax deduction

If you work from home, you may be eligible to claim a tax deduction for the work-related proportions of household costs. This guide will take you through the steps to claim a home office tax deduction.

Eligibility

To be eligible to claim home office expenses, you must:

• Fulfil genuine employment duties while working at home (e.g. regularly completing projects at home would count, whereas checking emails once or twice would not).
• Incur operational expenses as a result of the work you do from home.
• Maintain clear records of these expenses.

Types of Expenses

Home office tax deductions cover the cost of working from home and are split into two broad categories: running expenses and occupancy expenses.

Running Expenses

This category covers all the costs that go into running your office. Common running expenses include:

• Heating and cooling.
• Depreciating assets like office furniture, equipment, and even curtains, blinds, floor coverings, light fittings, and other fixtures.
• Cleaning and repair costs.

Occupancy Expenses

Occupancy expenses relate to people who use their home as a place of business, such as a self-employed hairdresser working from a home-based salon. If you are an employee who works from home, you need to justify that you have a dedicated room that you use for work. Common occupancy expenses include:

• Mortgage interest or rent.
• Council rates.
• Land taxes.
• House insurance premiums.

Methods for Calculating Deductions

From the 2022-2023 financial year onwards, there are two methods you can use to calculate home office expenses:

Fixed-Rate Method

The fixed-rate method allows you to claim a flat rate per business hour to cover the costs of working from home. For the 2022-23 tax year, the rate is 67 cents per business hour. This covers:

• Computer consumables and stationery.
• Mobile and home phone usage.
• Energy expenses (electricity and gas).

Note that you can't claim any other deductions in these expense categories if you use this method. However, you can still claim a separate deduction for the following:

• The decline in value of home office equipment and furnishings.
• Repairs and maintenance of that equipment.
• Cleaning costs (in the case of a dedicated home office).

To use this method, you need to keep a record of the actual hours spent working. From 1 March 2023 onwards, the Australian Taxation Office (ATO) will only accept timesheets, rosters, work logs, or a diary for the entire income year.

Actual Cost Method

The actual cost method is more time-intensive to calculate, but it may deliver better results for some people. To use this method, you must determine all the actual expenses you've incurred for work. These costs may include:

• Electricity and gas for cooling, heating, and lighting.
• The decline in value of home office furniture and furnishings.
• The decline in value of phones, computers, laptops, or similar devices.
• Cleaning costs (if you use a dedicated area for work).
• Computer consumables and stationery.

You'll need to keep a record of your actual work hours in a diary for a representative four-week period. To claim depreciation of assets, you'll need a receipt showing each item's original cost, as well as a calculation showing the percentage of the year you used the assets exclusively for work.

Non-Deductible Expenses

It's important to note that there are certain expenses that you cannot claim as deductions. These include:

• Coffee, tea, milk, toilet paper, or other household items.
• Children's education costs, such as online learning equipment or subscriptions.
• Certain occupancy expenses like water and rates.

Tips

• Set up a dedicated workspace: This will help you establish work/life boundaries and make it easier to keep precise records.
• Keep a diary: Record your small expenses and log your home office working hours.
• Consult a tax advisor: If you're unsure about what you can claim or how to calculate your deductions, consider seeking advice from a registered tax advisor or the ATO.

Frequently asked questions