attempt to make money is not sufficient . If you use an area for both business and personal purposes , it will not be exclusively set aside for business . The IRS uses a lawyer as an example : using a den to write briefs and prepare clients ’ tax returns , as well as for family recreation , does not qualify as exclusive use .
What is a principal place of business ? You may have more than one business location , but your home must be the principal place you work . You must take into account the importance of the activities that take place at your home , and the amount of time spent on the business activities there . If you use your home office exclusively and regularly for administrative or management activities of your trade or business ( e . g ., billing , writing briefs or memoranda , keeping records ) and you have no other fixed location where you spend a substantial amount of time conducting your trade or business , it will qualify as your principal place of business .
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There are two ways to calculate a home office deduction : actual expenses versus a simplified method . Using actual expenses requires determining the actual percentage of your home used for business and the limit on that deduction . You may not deduct expenses for any part of the year in which your home was not used in your trade or business . You must determine which are direct , indirect , or unrelated expenses . Direct expenses are those which relate solely to the use of your home for business ; indirect are those for maintaining and running the entire home . You must allocate business expenses for the qualified part of your home according to Code § 280A ( c )( 4 )( C ). Unrelated expenses are those for the non-business parts of your home ( e . g ., lawn care ) and are not deductible .
There are some expenses that are deductible to the extent they would have been deductible as an itemized deduction on your Schedule A ( Form 1040 ) or would have increased the standard deduction . These include real estate taxes , home mortgage interest , mortgage insurance premiums , and casualty losses attributable to a federally declared disaster . You may be surprised that the pandemic is not a federally declared disaster . If you have a home office , you may be able to deduct part of your insurance , rent , security systems , utilities and services , and telephones .
If you choose not to use actual expenses , you may use a simplified method . If you did not use your home office for the entire year , you will need to know the number of days in each month you conducted business in your home . You will also need the gross income derived from the business operated out of your home and the amount of business expenses that are not related to the use of your home ( e . g ., legal pads , pens , and postage ). You also cannot take depreciation under the simplified method . To come up with your deduction under the simplified method , if you used your home for a qualified business the entire year , you determine the area used ( to a maximum of 300 square feet ) and multiply it by $ 5 , currently the prescribed rate . Then subtract from gross income any business expenses not related to the use of your home . If these expenses are greater than the gross income from the business , you may not take a deduction . If your income is greater , use the smaller of ( 1 ) $ 5 times the area for a maximum dollar value of $ 1,500 and ( 2 ) the result of subtracting business expenses from gross income .
There are additional calculations you will have to make and you should ask your lawyer or other tax professional . Each year , you can choose whether to use actual expenses or the simplified method .
Regardless of how one figures home office deductions , you should look at other business expenses you pay to see if they constitute eligible deductions , such as the cost of a second telephone line used solely for business , dues , salaries , supplies , and depreciation for equipment . If you are a partner , you may be able to deduct unreimbursed ordinary and necessary expenses if you are required by your partnership agreement to pay these expenses yourself and they constitute trade or business expenses . However , if you are an employee , unreimbursed expenses such as mileage commuting to work and parking no longer constitute eligible deductions . Section 11045 of the Tax Cuts and Jobs Act completely eliminated all miscellaneous itemized deductions unless the aggregate exceeds two-percent of adjusted gross income ( AGI ) as set out in section 67 of the Code . 10 Work-related deductions that otherwise would be subject to the two-percent of AGI limitation , including unreimbursed employee expenses , remain available to eligible educators and individuals falling into any of four specific categories : ( 1 ) Armed Forces reservists , ( 2 ) qualified performing artists , ( 3 ) fee-basis state or local
ADF # DI2091.19
14 February / March 2021