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If you operate your business from your home, chances are high that you’ve been considering how to deduct the use of your home space on your taxes. The good news: The Internal Revenue Service offers home office deductions for business owners who don’t own or rent space for business operations. The bad news: Those deductions are subject to specific definitions of what qualifies as a “home office”.
I’m very lucky to own a house with more bedrooms than people. We bought a larger-than-necessary-for-three-people house so we could have space for our visiting friends and family. But I claimed one room as mine when we moved in. I installed a closet organization system, bought some bookshelves and a comfy couch, and enjoyed exercising, crocheting, sewing, and relaxing in “my room”.
Then I started Sunstone Bookkeeping, and the most logical move was to change “my room” to “the office”. I bought office furniture and equipment, moved my craft supplies to another room, and set up operations. I have signs to put on the closed door to warn my family in case I’m on a call or video meeting or working on a deadline (though the signs don’t seem to work on the dogs, as they still feel compelled to loudly let me know there’s a squirrel in the back yard). I continue to use the space for exercise three mornings a week as well as to read or crochet with the door closed when I need a little decompression time to myself, but most of the time it’s where I conduct business activities.
It’s that “most of the time” phrase that prevents me from claiming the space as a home office deduction. The IRS rules are very clear: the space (FYI, “space” can mean a room or a specific section of a room) must be used exclusively for business in order to qualify as a deductible expense. By using my office for any personal activities, the space is no longer exclusively used for business.
The most comprehensive source for information on all the specific qualifications and calculations is IRS Publication 587, Business Use of Your Home. You’ll also find worksheets, information on recordkeeping, and even specific situations for daycare facilities.
One more thing to keep in mind: The home office deduction is reported as an audit trigger by several financial sites:
https://www.personalcapital.com/blog/taxes-insurance/10-irs-audit-triggers/
https://www.thebalance.com/top-audit-triggers-that-catch-irs-attention-4153034
https://www.hrblock.com/tax-center/irs/audits-and-tax-notices/irs-audit-triggers/
That’s not to say you shouldn’t claim the deduction, but you need to make sure that you’ve carefully followed the IRS rules (including – and you know I’m always going to say this – keeping detailed records) in case you are audited.