Turbotax Home Office: Which Edition?

If you work from home, you may be wondering whether you qualify for the home office tax deduction. Unfortunately, if you are an employee working remotely, you do not qualify for this tax deduction. However, if you are self-employed or a 1099 contractor, you may be eligible to claim this deduction on your tax return. To qualify, your home office must be the primary location where you conduct your business, and you must use it exclusively and regularly for business purposes. You can use a portion of a room as a home office, but it must be clearly separate from your personal space.

There are two methods to calculate the home office deduction: the actual expense method and the simplified square footage method. The actual expense method involves determining the actual expenses of your home office, such as mortgage interest, insurance, utilities, and repairs, and then calculating the percentage of your home devoted to business use. The simplified square footage method, on the other hand, allows you to multiply a prescribed rate of $5 per square foot by the allowable square footage of your office, up to a maximum of 300 square feet.

Exclusive and regular use

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

You must use a portion of your house, apartment, mobile home, condominium, boat, or similar structure for your business on a regular basis. This also includes structures on your property, such as an unattached studio, barn, greenhouse, or garage. It doesn't include any part of a taxpayer's property used exclusively as a hotel, motel, inn, or similar business.

The exclusive-use rule means you must use a specific area of your home only for trade or business purposes. The exclusive-use area must meet these requirements:

• A room or other separately identifiable space, but it doesn’t need to be marked off by a permanent partition
• Not used at all for any personal purpose
• Doesn’t contain personal-use furnishings

However, you don’t need to meet the exclusive-use test if one of these applies:

• You use part of the home for the storage of inventory or product samples. Your home must be the only fixed location of the trade or business. You must use the storage area on a regular basis, and it must be suitable for storage.
• You use part of the home as a daycare facility for people physically or mentally unable to care for themselves or people age 65 or older. You must meet or be exempt from all state licensing or certification requirements. If you don’t meet the requirements or aren’t exempt from them, you must still meet the exclusive-use test.

Regular Use

Regular use means you use part of the home on a continuous, ongoing, or recurring basis. There's no specific definition of what constitutes regular use. Clearly, if you use an otherwise empty room only occasionally and its use is incidental to your business, you'd fail this test. If you work in the home office a few hours or so each day, however, you might pass. This test is applied to the facts and circumstances of each case the IRS challenges.

Exclusive and regular meeting space

To qualify for the home office tax deduction, you must meet certain criteria. One of the most important requirements is that you use a portion of your home exclusively and regularly for your business. This means that the space must be used only for trade or business purposes and not for any personal activities. It should also be used on a continuous, ongoing, or recurring basis, and not just a few times a year.

The exclusive-use area must meet the following requirements:

• It can be a room or another separately identifiable space, but it doesn't need to be marked off by a permanent partition.
• It must not be used at all for any personal purposes.
• It must not contain any personal-use furnishings.

However, there are a few exceptions to the exclusive-use test. You don't need to meet this test if:

• You use part of your home for the storage of inventory or product samples, and your home is the only fixed location of your trade or business.
• You use part of your home as a daycare facility for people who are physically or mentally unable to care for themselves or for individuals aged 65 or older. In this case, you must meet or be exempt from all state licensing or certification requirements for daycare facilities.

In addition to exclusive use, your home office must also meet the regular-use test. This means that you use your home office on a continuous, ongoing, or recurring basis. It should not be used only a few times a year.

If you meet these criteria and your home office is your principal place of business, you may be able to claim a home office deduction for expenses such as mortgage interest, insurance, utilities, repairs, and maintenance. This deduction can be calculated using either the simplified method ($5 per square foot for up to 300 square feet) or the actual expenses method, which takes into account the percentage of your home used for business.

Separate, unattached structure

If your home office is in a separate, unattached structure, such as a converted garage, you don't have to meet the principal-place-of-business or the deal-with-clients test. As long as you pass the exclusive- and regular-use tests, you can qualify for home business write-offs.

Exclusive use means that you must use a portion of your house, apartment, mobile home, condominium, boat, or similar structure for your business on a regular basis.

Regular use means that you must use the space for business on a regular basis. Incidental or occasional business use is not regular use.

The exclusive- and regular-use tests are the biggest roadblocks to qualifying for these deductions. For example, if you let your children use the office to do their homework, you violate the exclusive-use requirement and forfeit the chance for home office deductions.

However, the exclusive-use rule doesn't mean that you're forbidden to make a personal phone call from the office or that you have to rush outside whenever a family member needs a moment of your time. Individual IRS auditors may be more or less strict on this point, but some advisers say you meet the spirit of the exclusive-use test as long as personal activities invade the home office no more than they would be permitted to in an office building.

If your home office is in a separate, unattached structure, you can qualify for home business write-offs as long as you pass the exclusive- and regular-use tests.

Exclusive and regular use for storage, rental or daycare

The home office deduction is available to both renters and homeowners. It is available for office space and other areas used for business in your home, such as a studio, workshop, or garage. To qualify for the home office deduction, you must meet two requirements:

Requirement #1: Regular and Exclusive Use

You must regularly use part of your home exclusively for a trade or business. This means that you must use a specific area of your home only for trade or business purposes. The exclusive-use area must not be used at all for any personal purpose and must not contain personal-use furnishings. However, you can set aside a portion of a larger room to be used only for business, as long as your personal activities don't stray into it.

There are two exceptions to the exclusive-use rule:

• Storing Inventory or Product Samples: If you store inventory or product samples at home, you can deduct expenses for the business use of your home, whether or not you use the storage space exclusively for business. To qualify for this exception, your home must be the only fixed location of your trade or business, and you must use the storage space on a regular basis.
• Running a Qualified Day Care Facility: If you run a day care facility in your home, you can qualify for the home office deduction even if you use the same space for personal activities the rest of the time. To qualify, your home care business must meet any applicable state and local licensing requirements.

Requirement #2: Principal Place of Business

You must also be able to show that you use your home as your principal place of business. Alternatively, you must be able to show at least one of the following:

• You meet patients, clients, or customers at home.
• You use a separate structure on your property exclusively for business purposes.

If you meet the above requirements, deductible expenses for business use of your home may include the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs.

Actual expense method

The actual expense method is one of two ways to calculate your tax deduction for using your vehicle for business purposes. This method requires you to tally all of the actual costs incurred in the year that you used your vehicle. These expenses must be business-related to qualify for tax deductions.

The following items are eligible for tax deductions if used for business purposes:

• Automotive insurance
• Fuel for the vehicle
• Vehicle maintenance (oil changes, tire rotations, brake jobs, etc.)
• Registration fees, title, and licensing
• Vehicle depreciation deduction

If you haven't kept track of which of these items are business-related, you can estimate the business percentage of the items. To do so, add up all of the operating costs for the year, then multiply them by the percentage that you use the vehicle for business. For example, if roughly half of the vehicle's time is spent being used for business, you will multiply all actual vehicle expenses by 50%.

To calculate your deduction using the actual expense method, add together all of your vehicle expenses, then determine how much your car was used for business purposes. You can use a mileage tracker app to help you with this. Once you've added all your expenses and determined the percentage you use your car for business, you can calculate your deduction. Just take your total expenses and multiply the number by the percentage.

For example, if you've used your vehicle for business purposes 50% of the time and have the following expenses:

• Depreciation = $5,000
• Registration and license fees = $100
• Total expenses = $10,100

You would multiply this number by 0.50 (50%), the percentage of your business-related driving, to get the amount of the deduction. So, in this case, your deduction would be $5,050.

It's important to note that if you use the actual expense method in the first year, you will not be allowed to use the standard mileage deduction in future years. However, if you use the standard mileage deduction method in the first year, you can switch to the actual expense method in future years as long as you have not fully depreciated the vehicle.

Frequently asked questions