Schedule H: Home Office Deduction? Do I qualify?

Well, not exactly, but I got your attention, so you might as well read on. The Schedule H is actually used for Household Employment Taxes, but that‘s a topic I’ll reserve for another post.

In the current environment where many people are working from home, you may be wondering to yourself, “Do I qualify for the home office deduction?” The answer really depends upon your circumstances. However, it will be interesting the see how the IRS May have to redefine certain criteria following the COVID-19 pandemic. Something to ask your tax professional next year.

Let me start by explaning the current rules about the home office deduction. Before I go into the calculation, let’s examine the qualification parameters. In order to qualify you must meet the following criteria:

• Used exclusively and regularly for your trade or business

• That part of your home must be your primary place of business

There are some exceptions, such as daycare and storage use, but I’ll cover those later.

What exactly does exclusive use mean?

This is the tough one and must be evaluated clearly and honestly. Basically, your office must be a separate room or group of rooms in your house. It can also be a portion of a room only if the division is clear; maybe an office partition. Not exactly desirable decor, but who ever said the IRS was a model of home design.

Just a reminder that IRS code is law, and is very clear about the exclusivity requirement. Let’s say you have an office in your house that you work in all day, every day. The minute you let your kids do their homework in there, or let your wife troll though Facebook looking for old high school friends, you violate the exclusive requirement and mat compromise the ability to take the deduction. most auditors will say as long as the personal activity does not keep you from your home office any more than would be considered acceptable if you were in a outside office building.

What about regular use?

The definition of regular use is a bit vague. A bit like trying to interpret a van Gogh painting. Obliviously, if you use an area of the home that is also used for another purpose, such as the dining room table, or if you use an empty room occasionally that is not a materially required for your business, it would not qualify. On the other hand, if you work in the office for most of your work day, than it probably will, meet the “regular use” requirement.

Principal place of business

Finally, you must meet the requirement that home office must be your principal place of business. Therefore, it must be either the principal location of the business, or a place where you regularly meet with customers or clients. If the office is in a separate, unattached structure, such as a garage or shed (really??), than the principle place of business does not apply.

Exceptions

There are two primary uses where the exclusive use test is not applicable.

• The use of your home as a day care facility to provide care for children, the elderly, or handicapped individuals

• To store product inventory that is sold as part of your business

If you care for children in your home each day during regular work hours, you are allowed to utilize that portion of your house for personal reasons during the evening without losing the home office deduction. Let's assume your business is selling products online and you store inventory in your basement, but sometimes use that some storage are for personal items. This also will not prevent you from taking the deduction, provided that your home is the only location used for the business.

If all this seems difficult to understand, don't worry. Most people are afraid to take the home office deduction for fear of being audited. But, the reality is that's not exactly true, and if you are entitled to take the deduction, you should. Your tax professional should be able to guide you through the process of determine if you qualify, and than calculate what the deduction should be. For more details see my second post on the topic, "Home Office Deduction Part 2 - What Qualifies as a Business?"

Neglco Tax Services is staffed with tax professionals that have the knowledge and experience to help you prepare your tax returns and realize the full benefit of deductions allowed within the law, including the home office deductions.

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