Can You Take the Home Office Deduction? Probably Not

26 Comments

If you work from home, you may be wondering if you can deduct costs related to your home office — a part of your mortgage payment or rent, for example. But unfortunately the U.S. tax law in this area doesn’t recognize the work-life blend that most home workers practice. If you mix business and personal activities in your home office, you can’t take the deduction.

The Wall Street Journal reports that most people eligible for this potentially lucrative deduction probably don’t take it:

“It is questionable whether most taxpayers who are eligible to take the deduction actually do so,” IRS National Taxpayer Advocate Nina Olson said in a report to Congress last week. She urged lawmakers to offer taxpayers a simpler, optional method of calculating the home-office deduction. [subscription required]

Why don’t more people deduct home office expenses? The WSJ identifies a number of reasons: the law is quite complex, requires extensive record-keeping, and is perceived to raise a person’s risk of being audited.

What might be the ultimate barrier for many home-based web workers, however, is the law’s requirement that, in order to deduct expenses for your home office, you use that part of the home exclusively as your principal place of business. Very few people use their home office only for work, even if it is their main place of business.

This law hasn’t kept up with the reality of work today. If you set up a comfortable home office with a nice computer, filing system, and workspace, you’ll probably do your personal work there — paying bills, for example. You might play games on the computer or use it for socializing too.

The law could allow a proration of time based on how the office is used; for example, allowing you to deduct 80% of costs if you spend 80% of the time in your office working. While this would add to the record-keeping burden, it would have the great benefit of allowing home-based businesses the opportunity to deduct actual expenses, just like other businesses can.

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26 Comments

Barbara Saunders

I don’t particularly care about not being able to claim a home office deduction for working on a table in my bedroom. This is not money “lost”! If I were to rent an apartment (or buy a house) with an extra room set aside as an office, I’d be paying costs that the deduction would defray and that I don’t pay now, i.e., taking a net loss.

As part of simplifying my life, I also don’t deduct proportions of my internet and phone bills. (I do write off things like hosting my Web site.) I prefer to set up an operation with few associated expenses, run out of the infrastructure of my personal life. Of course – that works better for freelance writing than it might for kinds of businesses that require more formality.

her every cent counts

The home office tax deduction situation is, indeed, broken. I’ll likely not take any home deduction because I imagine the savings would be too small to merit risk of an audit. Besides, I live in a studio, and there is no room to separate my office and my living space. I considered designating one side of the room to be “office space only” but that seemed rather ridiculous, esp given that I live in a fairly small space. But I do work from home, and things like phone, internet, energy bills and the like honestly go to my “work time” in fair proportion. It’s just, as another commenter noted, not possible to deduct a percentage of these items and spaces. I wish it was.

jeff

the exclusivity issue is bizarre. is a “real” office not being an office when it’s used for a party, or when you take five minutes to call the doctor and set up an appointment, or talk to a bf/gf?

conversely, can i deduct from my rent if i take my laptop out of the office and sit in front of the tube when i need to mindlessly cut and paste code or edit copy?

in the end, i think this goes to anne’s point — the home/office split in the home office is blurry, because office creeps into home, but also because home *always* creeps into office, even when the office isn’t my, er, home.

Peter

I was going to say the same thing as Derek. Claiming a home office deduction is a great way to raise a flag for the IRS. If you’ve done any “creative” accounting, you definately don’t want them asking a lot of questions. Also, when you do the math, the deduction would be pretty small and it complicates things greatly when you sell the house.

BohRev

I understand the original reasoning behind it is: if you have to buy/rent a larger home in order to accommodate your workspace, that’s an expense you had and therefore you can deduct it. But if you were going to buy/rent that space anyway – so you could play games or email friends – then it wasn’t really a necessary expense, so no deduction. Which ends up being asinine, because technology has made it so the vast majority of businesses as well as home workers could reduce their “office space” to a laptop and a scanner.

I’d prefer dumping the deduction and replacing it with a generous tax deduction for NOT impacting the environment with your extra “work” bedroom, your big shiny office, and your commute. I think that’s the direction we should be moving in.

hipshott

Your lawyer is wrong. It depends on the distance to the office. I don’t recall the minimum distance.

Wendy

Even though my home office is indeed used as an office, I decided not to take the deduction because it’s my understanding that you have to recapture the deductions when you sell the house. It’s a LOT of bookkeeping.

Anne Zelenka

@Caroline: yes, as I said — “in order to deduct expenses for your home office, you [must] use that part of the home exclusively as your principal place of business”

The law should support a proration on how much you use the space for work vs. nonwork, not require people to set aside an entirely separate space (office or not) for work.

Caroline in Vail

Direct from a NY Attorney:
“..you aren’t allowed the deduction if you have a work
office…
Regarding the exclusivity rule, you don’t have to have a separate room for a
business use, but you have to have a certain area set aside and your
pro-ration of expenses would use that area vs. the whole area of the [apartment, house, etc].

hipshott

how about you wannabe North Americans save the political comments and focus on the article.
If I want cradle to grave SOCIALISM (which is what Canada is), then I will go back to Australia. I have no preference for the President or his/her opponents. BUT I am interested in a fruitful discussion regarding home office taxation.

Derek

The perceived risk of audit is pretty accurate. I had a co-worker that worked at the IRS for a while that said it was the number one thing that got you on the short list for an audit.

Alex G

Yes please, no bush voters here. I do write off part of my house as a business expense in Canada.

@Chris: I think general consensus is that you DONT want government putting your money where their mouth is. They’ve really picked up on that in the last couple of year with the whole iraq war shannanigance. $40 can coke of coke?

JamieO

Come to Canada – as Gerrit says our tax laws are very progressive. But only if you didn’t vote for Bush :)

Liza Lee Miller

Let’s face it, most people rarely use their WORK office exclusively for business. People check personal email, shop online during their lunch breaks, etc. So, expecting someone to do that at home is ridiculous and wasteful.

Chris @ eQuixotic

When is the government finally going to put their money where their mouths are and really *do* something about foreign oil dependence, traffic congestion, pollution, etc. by fully embracing telecommuting for their own employees and encourage telecommuting in the private sector with tax law and other policies? Improving the Internet infrastructure in the U.S. wouldn’t hurt either.

The time is now.

Gerrit

You can in Canada. You just need the forms from the CRA (available on their site) to show how much space of your home is used for this, etc. Any Cdn. tax program will actually calculate this for you too.

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