30 million Americans work out of a home office at least one day each week, according to a recent report. If you’re not already one of them, you might hope to be soon.
You may have been inspired by my post on home-based businesses you can start for nothing, or another post on ways to make money from home. Of course, to try one of those self-employment options, you need to set up an office or workspace at home.
Even if you work for one of the many companies that hire remote workers, you need a place where you can work productively. And by the way, did you know employees can take a home-office tax deduction? I’ll get to that in a moment, and I’ll tell you why I just took the deduction for the first time in years, even though I’ve been working at home for a decade.
OK, so you need to squeeze a workspace into your already crowded home. Fortunately, even if you don’t have a separate room, you can create a home office that’s functional and complies with IRS tests for deducting the expense. Here’s how to do it.
Where to Put Your Home Office
If you plan to claim a deduction on your tax return, make sure your office meets the requirements discussed below. Beyond those criteria, where you put your home office is largely a personal matter, and you may want to experiment. For example, having your desk in front of a window could distract you or help you be more productive. You might not know until you try it both ways.
Generally, a quiet place is best. If you live alone, that could be anywhere. Otherwise, look for someplace out of the traffic flow, and perhaps behind a closed door.
Quiet is a good start, but some locations may just not feel right. You may work better in one place rather than another without any clear idea why (at least, that’s my experience). If you have a laptop and a folding table, do this experiment: Work for a few hours in a location and then try another. After working in three or four places, you’ll probably have a good idea where to set up your office permanently.
Designing and Equipping a Home Office
You can get some great ideas from the home office photos on Houzz.com. They have screening options (left sidebar), so you can even look at office setups according to your budget. Keep in mind that you have to use the space exclusively for business to claim the expense at tax time, so don’t include things like exercise equipment or a television in your office unless you need them to do your work.
Some of your arrangements will depend on the nature of your business. Your desk can face the wall if you don’t deal with clients at home. If you regularly meet clients there, you may need to face the desk outward and add some comfortable chairs.
The equipment you need also depends on the nature of your business. A landline phone could be a good idea if you make more than a few short calls daily. You might want a stand-up desk in addition to your usual one, to give your bottom a break from time to time. Rather than speculate about the things you might need and clutter your space, wait and buy equipment as you become sure it’s necessary.
I like simplicity and functionality. For 10 years, my office desk has been a 2-by-4-foot foldable plastic table, the kind you can find at Walmart and other stores for $40 or so. Open-topped plastic file boxes save me the trouble of digging through file cabinets. Important files are right on my desk in a simple holder. A few pictures on the wall are sufficient decoration. I splurged only on the office chair, because I spend so much of my life sitting in it.
How to Set Up a Tax-Friendly Home Office
If you have a home office, you’ll want to get the tax benefit. To claim “expenses for business use of your home” (more commonly known as the “home office deduction”), the space you use must comply with IRS requirements. The most important rule is that you use the office “exclusively and regularly as your principal place of business.” The IRS adds:
“The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition.”
That means it can’t be your kitchen table, or corner desk used once in a while as an “extra” office. You don’t need a special room or even a divider, but having a “separately identifiable space” is crucial. The IRS notes that if the space is also used by your family for recreation you can’t claim a deduction, so establish a “no playing in the office” rule.
There are some exceptions, including when you use space for storing inventory related to your business. Read the rules carefully, and ask a tax accountant if you’re not sure about something.
Home Office Deduction Math
The regular method for calculating the home office deduction involves adding up household expenses and multiplying the total by the percentage of the home used for business. Depreciation expense is figured by determining the value of your home, deducting the value of the land, dividing the result that by 27.5 (the standard number of years for depreciating a house), and multiplying that result by the percentage of space used as an office. Then, when you sell the home someday, you have to “recapture” the depreciation you took, possibly paying enough tax to lose all the benefits you gained.
You can still use the regular method. But even the IRS says, “The standard method has some calculation, allocation, and substantiation requirements that are complex and burdensome for small business owners” (emphasis added).
The good news is that as of 2013, there is a new simplified option — no more depreciation or recapture calculations. You don’t even have to keep track of your home expenses. Now it’s this simple:
Multiply the square feet you’re using as an office (maximum 300 square feet) by $5 per square foot to arrive at your expense deduction.
For example, if you use a 10-by-12-foot area of your living room as an office, just multiply those 120 square feet by $5 and enter $600 as your home office expense on Schedule C (Form 1040) if you’re self-employed. Depending on your federal marginal tax rate and state income tax rate, the deduction could save you as much as a few hundred dollars.
It takes a couple minutes of measuring and doing simple math to save hundreds of dollars. This new simple method, and the lack of depreciation recapture, is why I finally claimed a home office deduction.
Home Office Deductions for Employees
Not self-employed? If you work for an outside company, you can also claim expenses for business use of your home. You’ll do the calculation the same way, but rather than using Schedule C, the IRS says, “you must itemize deductions on Schedule A (Form 1040) to claim a deduction for the business use of your home and any other employee business expenses.”
The requirements are the same as if you’re self-employed, but you must also meet these additional criteria:
- Your business use must be for the convenience of your employer, and
- You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer
- If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home
Again, ask a tax accountant if you’re not sure you’re in compliance with the rules. Once you are, and if your office stays in the same place, it takes only a few extra seconds to take the home office deduction each year.
Your Turn: Do you have a home office? How did you set it up for maximum productivity, minimal cost and compliance with IRS rules?
Steve Gillman is the author of “101 Weird Ways to Make Money” and creator of EveryWayToMakeMoney.com. Of the more than 100 ways he has personally made money, writing is his favorite (so far).