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Have you considered making deductions for your home office, but figured it wasn’t worth it? You should probably consider it more seriously. Even a small home office can save you thousands in out-of-pocket taxes. In fact, you can claim these deductions even if another office for your business is located outside your home. The IRS actually has special rules that allow the tiniest of offices to qualify. Don’t believe it? A man named Albert Mills actually (and successfully) defended a deduction for his office stationed in a 422 square-foot apartment[1].
Of course, there is a catch. You can’t just throw together any set up and tell the IRS you have an office in your home. They do have requirements you’ll have to follow to get the tax benefit. As long as you follow the tips in this article, you can also find out why small home offices can generate big money savings.
Let’s Find the Deductions
With an office in your home, you’ll be able to make deductions for two main types of tax savings. First, you can deduct a portion of your home expenses, like mortgage, property taxes, rent, and utilities[2]. Second, you can deduct the miles for the commute back and forth between your home office and your outside office[3].
How does this add up in terms of dollars? Let’s say you have an office about fifteen miles from your home. With a home office, the commute between the two now counts as business miles, which are deducted at a rate of $0.56 per mile (the standard mileage rate). So, your two-way commute generates a deduction of $16.80. Making this commute five days per week for fifty weeks generates a $4,200 deduction! Think about it—you would have had a $0 deduction for this without your home office.
What Are the Rules?
Important: For the IRS, the main consideration when designating a space in your home as an office is that you use it exclusively for business. This means you cannot use the space for personal reasons at all during the tax year[4]. But, don’t worry. You do not have to designate an entire room as an office. You just have to keep your office area dedicated to business. It doesn’t even require walls or partitions separating it from the rest of the room[5].
Additionally, the IRS actually provides a bit of leniency for those with very small homes. They allow what they call “de minimis” personal use[6]. You still can’t use your home office for non-business reasons, but they allow that passing through the area for personal reasons is fine. In one case, for example, a man had to pass through an office space built in a walk-through closet in order to reach his bathroom[7]. The court decided in his favor.
Just don’t get too lax with the “de minimis” exception. The courts deny this exception in cases of storing personal items in the office space[8] or hosting occasional family meals in it[9]. If you pass through the area, you’re fine. If you’re actually using it for personal uses, you’re probably breaking the exclusive use rule.
The Minimalist Home Office
Tax law states that your home office must be the principal office for your business in order to qualify for this deduction. This means you should be performing most of the administrative and management activities for your business at the office in your home. The good news is you don’t need a lot of space to make the area your principal office.
Would you like to know how to create a one square-foot office space? Just buy a tall, narrow cabinet or shelf that extends all the way to the floor. Store all your business documents, files, and supplies there. When working at home, you can simply pull up a small table and chair, and voila! You have a home office that cost you little time or money.
Whatever room your mini office is in, you can engage in personal activities anywhere in the room except where the cabinet is. Then, claim only the area of the cabinet space on your tax deductions. You can claim as much space as you use exclusively for business use. A mini office won’t generate big savings on home expenses, but it can create significant deductions on vehicle expenses.
Now, you see why even a small office space can be beneficial. The size of your business space makes no difference. Just devote some space in your home exclusively to business purposes and make sure it qualifies as the principal office for your business. Rather than just commuting to the office when you leave your home, you’ll be racking up miles of deductions for your vehicle expenses.
- Albert Victor Mills, TC Memo 1991-592. ↑
- IRS Form 8829. ↑
- Rev. Rul. 99-7. ↑
- Sam Goldberger, Inc. v Commr., 88 TC 1532. ↑
- Prop. Reg. Section 1.280A-2(g)(1). ↑
- Lauren E. Miller, TC Summary Opinion 2014-74. ↑
- Carl D. Hughes, Jr., TC Memo 1981-140. ↑
- Elmer Stalcup, TC Memo 1995-43; but see Ronald Culp, TC Memo 1993-270, in which the court did allow the de minimis exception for storage. ↑
- Paul M. Sengpiehl, (1998) TC Memo 1998-23. ↑