I once asked my doctor what he thought about pharma ads and their ubiquitous tagline of “ask your doctor if Xilipum (not a real drug, I hope) is right for you.” He was not a fan.
Now that I’m a CPA, I can partially commiserate. Joe Schmo loves to tell our client they should “just deduct X,” then they’ll be a millionaire/cure cancer/save the world/etc. Our client, in turn, will ask us if Deduction X is right for them.
99 times out of 100, it’s not. One of the most common questions I get when we go down that line of thinking is if they can take the Home Office Deduction.
(Note: Yes, I do realize the irony of running a website talking about all kinds of random deductions yet complaining about clients bringing up all kinds of random deductions. Feel free to point and laugh at my complaints)
For a few people out there, they can get a huge benefit from this deduction, but it’s not, surprisingly enough, from the actual Home Office Deduction. But before I get to that, I need to go into a lot of throat clearing background about the Home Office Deduction.
If you already know your Home Office stuff, feel free to skip down to the surprising twist ending.
How to Qualify for the Home office Deduction
A huge pro and con of the internet is that lots of us can work from anywhere. Some companies made huge pushes to allow people to work from home (and some later retracted the benefit). If you’re working from home, you probably have a room where you do your work, probably with a catchy name like, um. . .the home office.
If you’re really creative, it’ll be something more like “Tim’s Home Office.”
Deducting that home office against your tax bill, well, that’s even better.
The problem, like always, is in the details. To qualify under Section 280A(c) (reference provided for those real nerds out there), you’ll need to meet the following requirements:
- The Home Office MUST be used 100% for business.
- The Home Office must be the principal place of business. Fortunately, this has been defined to include a place where you administrate or manage the business if you have no other place. (For example, a doctor who sees her patients in a hospital but does billing, Quickbooks, etc. from her home office could still take the Home Office Deduction)
- If you are an employee, it MUST be at the convenience of your employer. (For example, the employer doesn’t want to get you office space, so they say to just work from home)
(Note: these are the general rules. It does get more complicated, but we’re talking about the 99.5% here)
Pros and Cons of The Home Office Deduction
Let’s just assume you qualify to make things easy. That deduction still not be right for you.
If you are an employee on a W-2, you almost certainly won’t see much benefit from it. The Home Office Deduction will be on your Schedule A (itemized deduction) as one of those Job Expenses and Certain Miscellaneous deductions, which means you only get a deduction if you (a) are itemizing your deductions and (b) your Home Office Deduction, combined with your other deductible Job and Misc Expenses, are more than 2% of your Adjusted Gross Income.
That means if you make $50k a year, you’d need to have over $1,000 in Home Office expenses to even start seeing a deduction. Assuming you already itemize.
Any good CPA will still see if the deduction’s right for you, but chances are if you’re an employee, it’s not.
What if you run a small business and report it on your Schedule C? Then the Home Office Deduction starts to make more sense. You can allocate a portion of your utilities, internet, rent or mortgage, HOA dues, etc. to your business.
You can, if you want, actually depreciate part of your home through the Home Office Deduction as well. Just be careful because you will have to recognize income on any depreciation when you sell the house. Most of my clients skip on the deduction when they hear that caveat, since it ends up serving as a loan from the IRS rather than an actual deduction.
So you can get a deduction if you run or do the administration of your business out of your home. It’s just unlikely to be a huge deduction
The Real Benefit of the Home Office Deduction
I’ve never thought much of the Home Office Deduction because it rarely as big as you think it’ll be. However, I was just introduced to a crazy, generally approved deduction that could potentially be a huge benefit.
So let’s switch gears to commuting. Commuting is driving from your home to your work place. Commuting is basically never deductible.
Going from one place of business to another, however, is typically deductible under Sec. 162(a).
Do you see where I’m going with this yet?
Let’s say you’re an independent contractor in the construction business. You drive to the worksite, do your work, then come home. The drive from your home to the worksite is a commute and not deductible. UNLESS you have a qualified Home Office. Suddenly, you’re no longer commuting. You’re now traveling from worksite to worksite.
Guess what? That Travel Expense is now deductible. And it can really add up, especially if you have a long
commute business travel route.
This, however, is where you have to be careful. I mentioned the construction industry because that’s from an actual court case, Glenn Patrick Bogue v. Commissioner. Bogue tried to deduct the travel from his home office to his worksite. Let me quote the court on this:
Although a taxpayer can deduct expenses for traveling from his home office to a worksite, the taxpayer did not have a “home office” because the space he used in his residence was not exclusively used for his business.
See, Bogue got in trouble because his girlfriend used the office for things unrelated to the construction gig. So if you want to deduct those travel miles, make sure your SO isn’t doing the budget in there and the kids aren’t sneaking in to play Minecraft.
What if you a hair stylist renting a booth but manage your business from your home office? As long as that home office is used exclusively for the administrative or management activities of your trade or business, and you have no other fixed location to do those management activities (see Pub 587 pg 4), then traveling from your home office to your rented booth is business travel expense.
How about that doctor running her business from home then seeing her doctors at the hospital? Same deal, should be deductible.
What about that W-2 employee with a home office at the employers expense who has to travel to the corporate office every week or so for meetings? The Home Office Deduction might not add much benefit, but the deductible travel miles probably will.
Not Without Controversy
I want to warn you that the IRS is typically more concerned with you trying to convert your commuting miles into travel expense than they are with a small Home Office Deduction, so make sure you have all your t’s crossed and i’s dotted.
And, this is where I get to the good part: check with your CPA or EA to make sure the Home Office Deduction and related Travel Expense is right for you. If they need a little help, point them to Rev. Rul. 99-7.