Updated: Jan 14, 2019
Home office deduction:
The home office deduction is one of the commonly used deductions. However, it is often misapplied. In order to qualify for the deduction, you must meet two criteria: (1) exclusive & regular use and (2) principal place of business.
To qualify for the exclusive & regular use test, the portion of your home needs to be exclusively and regularly used for business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room. Ensure that any personal activities are kept to a minimum and do not exceed what would be permitted at an office building. The IRS allows two exceptions to this rule where certain personal usage are allowed: daycare facilities and storage.
To qualify for the principal place of business test, the office must be your principal place of business or where you meet with your customers or clients. The principal place of business would be where you conduct your administrative or management activities so long as there is not another place where these activities are substantially done. For example, if you conduct most of your income-earning activities somewhere else (such as outside salespersons, tradespeople, or professionals), your home office can be deductible.
Employees can also qualify for this deduction if the space is used for the convenience of your employer and it is not already paid or reimburse by your employer. This is common with remote workers. However, if the use of the home office is merely appropriate and helpful, you cannot deduct expenses
There are two ways to calculate this expense: traditional and simplified. The traditional method requires you to calculate the percentage of your office and allocate it to your expenses. This can be a tedious process. On the other hand, the simplified method allows a flat rate that you can apply to the square footage of your office, not to exceed 300 square footage.
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