The federal tax law signed by President Donald Trump Dec. 22, 2017, may affect home ownership tax benefits described in this article. The new law goes into effect for the 2018 tax year and generally doesn’t affect tax filings for the 2017 tax year. Here’s a detailed summary of the changes.
Should I take the regular or simplified home office deduction? Is my remote work setup even eligible for the deduction? Why is this so hard? You can stop spinning now.
The author of “Julian Block’s Home Seller’s Guide to Tax Savings” untangles this intricate deduction.
Office Setups: What’s OK?
1. Can I put a home office anywhere?
Julian Block: Anywhere, so long as it meets the primary rule in the IRS criteria: You must use the space exclusively and on a regular basis for your business, and it must be your primary place of business. If that’s the case, put up a partition in your living room, turn a closet into an office, set up a TV tray over your bathtub.
2. I’m a massage therapist, but I don’t work full-time. Does my studio qualify for a home office deduction?
J.B.: If your studio is your principal place of business, and it’s used exclusively and on a regular basis, then you qualify. Section 280A of the Internal Revenue Code provides guidelines. You don’t have to work full-time.
3. My home office is a separate building. How much is deductible?
J.B.: A separate structure is easy for the IRS to identify as a qualifying home office, as long as you use it regularly and exclusively for business. If you use Form 8829 to take actual expenses, you can depreciate the entire cost to build a separate office structure.
4. I converted a big closet to an office space. Can I deduct that?
J.B.: Partitioning or physically defining your home office in some way is helpful, but not required by the IRS in determining if your space is a home office.
5. I run my business on a laptop, which I use anywhere. How do I claim a deduction?
J.B.: Sorry, no home office deduction for you. But you may depreciate your laptop (and other business-related equipment) on Schedule C. Or, claim “first-year expensing,” which may allow you to write off the entire cost of your equipment at once.
Deducting Utilities and Upgrades
6. What portion of my home utility bills is deductible?
J.B.: Good question — especially if you’re this guy! Deduct utility costs as a percentage of your total utility bill if you use Form 8829. For example, if the square footage of your office equals 10% of the total square footage of your home, you can deduct 10% of your total utility bills. If you use the simplified home office deduction ($5 per square foot up to 300 square feet or $1,500), you can’t also deduct your home office utility costs.
7. I’m remodeling to include a separate entrance for my business. Is the project deductible?
J.B.: It’s not a deductible expense; rather, it’s depreciable. The cost of building a separate entrance gets added to the cost basis of your home. For a look at how depreciation is figured, check IRS Publication 946. (Note: Depreciation isn’t relevant if you take the simplified home office deduction.)
8. Is a portion of the maintenance I do on my home deductible for my home-based business?
J.B.: Probably not, unless the maintenance is connected to your work. If you have a landscaping design business, then maintenance may be essential to your livelihood, and a portion might be deductible. Consult your tax adviser.
9. I work in the same home office space as my husband, but we have separate businesses. Can we both take the home office deduction?
J.B.: Each business must file its own Schedule C, but only one of you can take the deduction for the home office space.
10. I’ll be out of town for a while. Can I claim any part of the home office deduction if I work while I’m away?
J.B.: If your main place of business meets the regular requirements for exclusive, regular use, then the deduction still applies when you work while traveling, or do some tasks from a fixed location other than your home.
11. If I conduct business mainly outside my home, can I still deduct the space in my garage where I store my inventory?
J.B.: The storage space you claim for a deduction must be separately identifiable and suitable for storage. So even if you work outside the home sometimes, your home must be the only fixed location of your business and you must use the storage space regularly. Storage space expenses are deductible even though you don’t use this part of your garage exclusively for business.
12. I use a lot of living space for my home-based day care business, but at night and on weekends, the kids are out of there. What’s deductible?
J.B.: The general rule to qualify for the home office deduction is “regular and exclusive use” of the space. But a home-based day care is an exception: It must be used regularly, but not exclusively. If that’s the case, you must factor in the percentage of time that part of your home is used for the business.
Let’s say you use 50% of your home as a day care 8 hours a day and five days per week. And say that all your relevant expenses (utilities, insurance, etc.) add up to $1,000 for the year. Here’s your formula:
Expenses multiplied by (work hours per week divided by number of hours in a week) multiplied by the percentage of the home you use
($1,000 x (40 / 168) x .50) = $119
Finally, you must also meet all necessary licensing requirements to operate a day care.