Do you work from home? Are you using your home to start or run your business? We often get questions about the benefits of the home office deduction. While there are pros and cons to this deduction, we generally believe the cons outweigh the pros.
Home Office Basic Requirements
- Regular and exclusive use — the space has to be used for business and only business.
- Principal place of business – your home must be used to conduct substantially all of your business. If your employer provides work space at their office but you choose to work from home, you do not meet this test.
Once those tests are met, you must decide to use the simple deduction method ($5 per square foot up to 300 feet) or the regular deduction method (actual expense).
PROS of Home Office Deduction
- It’s a tax deduction!
- It is a good deduction if you are a sole proprietorship or partnership. You can take the deduction directly from income (not subject to the 2% limit like employees).
- It is awesome if you rent! Rent is deductible as a percentage of your office use.
CONS of Home Office Deduction
- The simplified method means you can only deduct up to $1500 for your home office. The regular method means you have to tediously track ALL costs related to your office — think a percentage of your home’s utilities, repairs, insurance, as well as those new lighting fixtures.
- Employees (s-corp. owners included) are subject to a limitation 2% of their income (AGI) before taking this deduction. For example, if you earn $150K, you can’t use your home office deduction ($150K X .02=$3,000) because your limitation of $3,000 exceeds the deduction $1,500.
- Ever heard of depreciation? Depreciation is when you get a deduction for the purchase of business property. If you have a home office you get to deduct a percentage of your house over time, which sounds awesome. But, there is a catch. While you get an annual write off, there is a limit, and when you sell your house you are required to pay taxes on the amount depreciated. This deduction can turn the tax FREE sale of your primary residence into a taxable event.