Small-business owners and entrepreneurs who work from home could save big money on their taxes by taking the home office deduction, as long as they meet the IRS’ requirements and keep good records.
If you use part of your home regularly and exclusively for business-related activity, the IRS lets you write off associated rent, utilities, real estate taxes, repairs, maintenance and other related expenses. Here’s what small businesses should know about the home office deduction. In this case, ordering our home office components, cabinets, or bookcases, might even qualify as a business deduction!
Who qualifies for the home office deduction
You can claim the deduction whether you’re a homeowner or a renter, and you can use the deduction for any type of home where you reside: a single-family home, an apartment, a condo or a houseboat. You can’t use it for a hotel or other temporary lodging.
The home office deduction rules also apply to freestanding structures. You can use a studio, garage or barn space as your home office as long as the structure meets the “exclusive and regular use” requirements.
Here are the conditions you’ll need to meet:
Regular and exclusive use: The space you’re using for business must be used exclusively for conducting business. For example, using a spare bedroom as both your office and a playroom for your children likely makes you ineligible.
There are two exceptions. If you provide day care services for children, elderly (65 or older) or handicapped individuals in that part of the house, you can probably still claim business deductions, as long as you have a license, certification or approval as a day care center under state law, according to the IRS. The other exception is if you use the office for storage of inventory or product samples you sell in your business.
Principal place of business: Although your home office doesn’t have to be the only place you meet your clients or customers, it must be your principal place of business. That means you use the space exclusively and regularly for administrative or management activities, such as billing customers, setting up appointments and keeping books and records, according to the IRS.
» Ready to work with a financial planner? The form below will put you in touch with an advisor at Facet Wealth, a fee-only, fiduciary online planning firm. They aren’t tax preparers, but they can help you with tax and estate planning.
How to determine your home office deduction
You can determine the value of your deduction the easy way or the hard way.
With the simplified option, you aren’t deducting actual expenses. Instead, the square footage of your space is multiplied by a prescribed rate. The rate is $5 per square foot for up to 300 square feet of space.
The regular, more difficult method values your home office by measuring actual expenditures against your overall residence expenses. You can deduct mortgage interest, taxes, maintenance and repairs, insurance, utilities and other expenses.
You can use Form 8829 to figure out the expenses you can deduct.
Simplified version vs. actual expense deduction
The choice whether to use the simplified deduction, if you’re eligible for it, or to deduct actual expenses depends mainly on which would net you the bigger tax deduction.
The actual expense method
If you use the actual-expenses method, you can deduct direct expenses — such as painting or repairs solely in the home office — in full. Indirect expenses — mortgage interest, insurance, home utilities, real estate taxes, general home repairs — are deductible based on the percentage of your home used for business.
Example: Let’s say you paid $3,000 in mortgage interest, $1,000 in insurance premiums and $3,000 in utilities (all indirect expenses) plus $500 on a home office paint job (direct expense) during the year. Your home office takes up 300 square feet in a 2,000-square-foot home, so may be eligible to deduct indirect expenses on 15% of your home.
That could mean a deduction of $1,050 in indirect expenses ($7,000 in expenses, multiplied by the 15% of space used in the home), plus $500 for the direct expense of painting the home office, for a total deduction of $1,550.»
The simplified version
If your home office is 300 square feet or less and you opt to take the simplified deduction, the IRS gives you a deduction of $5 per square foot of your home that is used for business, up to a maximum of $1,500 for a 300-square-foot space.
In this case, using the simplified method could make more sense because you’d get only $50 more in deductions by documenting actual expenses. You should also consider the time it will take you to gather receipts and records.
The simplified method can work well for single-room offices and small operations.
The actual-expenses method might work better if the business makes up a large part of the home.
Things to watch out for
Receipts. If you plan on deducting actual expenses, keep detailed records of all the business expenses you think you’ll deduct, such as receipts for equipment purchases, electric bills, utility bills and repairs. If you’re ever audited by the IRS, you’ll be prepared to back up your claims.
Anxiety. Don’t let the fear of an audit keep you from taking the home office deduction.
Home sales. If you’re a homeowner and you take the home office deduction using the actual-expenses method, it could cancel out your ability to avoid capital gains tax when selling your primary residence. People who sell their primary residence after having lived in it for at least two of the five years before the sale generally don’t have to pay taxes on up to $250,000 in profit on the sale, or $500,000 if married filing jointly, according to IRS Publication 523.
Depreciation. If you use the actual-expenses method, you’re required to depreciate the value of your home. Depreciation refers to an income tax deduction that lets taxpayers recover the costs of property, due to wear and tear, deterioration or obsolescence of the property, according to the IRS. The depreciation you’re required to take in home office deductions is subject to capital gains tax when you sell your home. For example, if you own your home, use 20% of it as a home office and deduct depreciation, 20% of your profit on the home’s sale may be subject to capital gains tax. However, if you use the simplified method, depreciation isn’t a factor and you may not be subject to the tax.
The rules on tax deductions for a home office can be hard to digest. Consult with a tax advisor or use the appropriate online tax software if you’re unsure about how to proceed.
COVID-19 has brought unprecedented human and humanitarian challenges. Many companies around the world have risen to the occasion, acting swiftly to safeguard employees and migrate to a new way of working that even the most extreme business-continuity plans hadn’t envisioned. Across industries, leaders will use the lessons from this large-scale work-from-home experiment to reimagine how work is done—and what role offices should play—in creative and bold ways.
Before the pandemic, the conventional wisdom had been that offices were critical to productivity, culture, and winning the war for talent. Companies competed intensely for prime office space in major urban centers around the world, and many focused on solutions that were seen to promote collaboration. Densification, open-office designs, hoteling, and co-working were the battle cries.
But estimates suggest that early this April, 62 percent of employed Americans worked at home during the crisis,1 compared with about 25 percent a couple of years ago. During the pandemic, many people have been surprised by how quickly and effectively technologies for videoconferencing and other forms of digital collaboration were adopted. For many, the results have been better than imagined.
According to McKinsey research, 80 percent of people questioned report that they enjoy working from home. Forty-one percent say that they are more productive than they had been before and 28 percent that they are as productive. Many employees liberated from long commutes and travel have found more productive ways to spend that time, enjoyed greater flexibility in balancing their personal and professional lives, and decided that they prefer to work from home rather than the office. Many organizations think they can access new pools of talent with fewer locational constraints, adopt innovative processes to boost productivity, create an even stronger culture, and significantly reduce real-estate costs.
These same organizations are looking ahead to the reopening and its challenges. Before a vaccine is available, the office experience probably won’t remain as it was before the pandemic. Many companies will require employees to wear masks at all times, redesign spaces to ensure physical distancing, and restrict movement in congested areas (for instance, elevator banks and pantries). As a result, even after the reopening, attitudes toward offices will probably continue to evolve.
But is it possible that the satisfaction and productivity people experience working from homes is the product of the social capital built up through countless hours of water-cooler conversations, meetings, and social engagements before the onset of the crisis? Will corporate cultures and communities erode over time without physical interaction? Will planned and unplanned moments of collaboration become impaired? Will there be less mentorship and talent development? Has working from home succeeded only because it is viewed as temporary, not permanent?
The reality is that both sides of the argument are probably right. Every organization and culture is different, and so are the circumstances of every individual employee. Many have enjoyed this new experience; others are fatigued by it. Sometimes, the same people have experienced different emotions and levels of happiness or unhappiness at different times. The productivity of the employees who do many kinds of jobs has increased; for others it has declined. Many forms of virtual collaboration are working well; others are not. Some people are getting mentorship and participating in casual, unplanned, and important conversations with colleagues; others are missing out.
This article is about home office design using off-the-shelf cabinet, desk, and related components, like we offer at Highlands Designs. A typical home office includes at least one of the following items: a desk, a file cabinet, cabinets for storage of supplies, and bookshelves for books, manuals, business information, or other personal items. The following is one story about getting started.
Jo Heinz is president of Dallas interior architecture and design firm Staffelbach. Entrepreneur.com asked Heinz for advice on designing a home office for maximum efficiency. Here’s what she had to say:
How does designing an effective home office differ from designing a commercial office? And what considerations do you need to keep in mind even before you get started? Working from home is exciting because it offers an opportunity for real comfort and efficiency, but if the office is too casual, or isn’t effectively separated from the home environment, peak productivity may be lost.
While comfort is essential in any office, an office that is too casual may seriously impede the ability to get things done. You have to find a way to separate yourself from the rest of the goings-on in the home and to convey a sense of “off limits” to all other normal and natural home sounds and interruptions.
A distinction has to be made regarding the physical boundaries of this working space. The most effective way to do that is with the design of the space itself.
Ask yourself these questions before you begin:
What will you be doing in the space?
What type of work needs to be done?
Will external clients be visiting the space?
Will colleagues visit for collaborative work?
What type of materials will be referenced and/or stored?
What type of equipment is required?
When will I be doing the bulk of my work?
Will I be making conference calls?
Will I be video conferencing?
The answers to these questions will begin to develop the program for your home office.
The next step is setting up your space. Where are you going to put your office? It doesn’t need to be large or expansive, but it should be separate from other areas. You might be able to convert the guest room you only use a few times a year or another underutilized area into your office. Evaluate how the space you find can be dedicated for your use and can be “your space.”
Keep all of your work in that space because it’s important that you be able to find things, retrieve things and be efficient within this space. You will also want to keep the non-office space in your home free of work items. This promotes healthy balance and allows you to relax at home when you are not at work.
Establish set hours for your work at home. This contributes to your life balance, and should also help you be more productive and organize your day. The biggest problem home workers have is the loss of distinction between work life and home life.
Compartmentalizing your day into identifiable segments will help. Set up an established outline of time that you know you will spend in your office. That will help you develop a plan for productivity.
What are the most common mistakes people make when they’re setting up a home office?
There are five:
Thinking you can “tune out” the plasma screen on the wall. Don’t hang it anywhere near where you’ll be working.
Inadequate storage components
Lack of space for reference materials
Slow and inefficient equipment
Inadequate wire management (cords and wire spaghetti everywhere)
What are the most important five things to consider when you’re setting up a home office?
Equipment. Speed and efficiency are critical at home. But make careful decisions. Question whether that large color copier is a real necessity or if a trip to the neighborhood Kinkos will suffice. Don’t pay for equipment you won’t use on a daily basis.Investigate a wireless hub for your office so you have the flexibility to work on your laptop from your desk, your chair or a table, and at both standing and sitting heights. This simple option can enhance your creative problem-solving and thinking ability.You’ll want a separate phone line to your office so no business associate or client gets a busy signal. Also, make sure your phone has the capability for messaging, conferencing and speaker functions.
Be sure you have a local and responsive computer support team that will make home service calls promptly. You need to know you can rely on the equipment you have to work.
Be sure you invest in the fastest equipment available, so you don’t spend your time waiting for things to work.
And don’t forget insurance on that equipment. Affordable policies will insure your home office equipment in the event of a loss or disaster. You’ll want this peace of mind. Many insurance companies offer special coverage for home workers.
Lighting. Good lighting is essential. Ideally you want as much natural daylight as possible. If your space has a window, it will enhance the lighting. Daylight is the most evenly balanced source of white light available, in that sunlight has an approximately equal proportion of each color of the spectrum. This light, however, never has a constant color and its beauty comes from the way it is reflected and from the way it is refracted by the earth (as in differing times of day). The color of natural light also differs based on geographic location. It is always beneficial to have as much natural light as possible in the working area.If no daylight is available, a combination of general and task lighting will be required. A high-quality task light will be essential for late nights or cloudy days. If your home office is in a basement or a room without windows, check out daylight-replicating light sources that will provide energy-efficient, full-spectrum lighting. Many ergonomic task-lighting fixtures have dimmer switches so you can control the amount of light.The most effective lighting brings out the fullest quality of the colors illuminated. If lighting levels are too low, there can be negative psychological effects, including depression. For human comfort, a yellow-cast illumination is best. It is the color of brightness, and midway through the color progression from cool to warm.
To avoid glare, don’t place overhead lighting directly above computer screens, and don’t put a computer screen directly in front of a light source. That will cause eyestrain.
Energy guidelines are leading to new reduced-light levels in offices that are easier on the eyes. The most critical factor with lighting is the ability to control its brightness and intensity.
Privacy. No one can work effectively in a sea of noise or interruptions. When planning your office area, ensure that it affords a degree of privacy from surrounding activities. While headphones may serve to isolate certain sounds, no one wants to be forced to wear headphones all the time. Portable screens can be used to shield the work area from nearby activities. Alternatively, divider walls that double as bookcases will not only divide the area but provide superior storage solutions.To assist in creating the quiet needed for real concentration and work, a degree of white noise can be helpful. Air filters and low fans will operate at a quiet speed to muffle other noises.If a door to the office area is not practical or available, it may be helpful to add signage (e.g., “No interruptions” or “Quiet please”) to remind others in the space that this is “work time.”
Layout/organization. The old rule, “a place for everything and everything in its place” was coined to relieve stress. If you have carefully thought through your storage requirements, you’ll have the space you need.The desk surface of your choice will serve to support your laptop or desktop computer and work-related items. Your desk will likely be the place where you spend the most time. Consider the myriad of options available for organization of papers on your desk. What is essential for productivity is an organized desk that keeps pending work in order and prevents the chaos of disorganized piles.Solutions are as simple as pencil cups or trays to keep all writing instruments in one place, plus memo and business card holders so, literally, there is a place for everything. Shops such as The Container Store make it easy for you to get organized and stay that way. In this day and age, there are so many options for storage, the challenge is more in finding what works best with your flow of paper and work. Do you find yourself working from left to right? Does your paper trail have a distinct flow? Remember than when planning how you store your items.
Italian product designer and manufacturer EmmeBi has amazing examples of how it organizes an office, both commercial and residential. You can use those ideas for inspiration and, if your budget requires a more modest approach, mimic the same look with some of the items found at Target , Ikea and similar stores.
Ergonomics. Your health, safety and welfare are critical. Therefore, the items you choose should be ergonomically designed to promote your health and well-being while using them.Chair manufacturers have made significant improvements in adjustability and comfort for computer users. They have even researched the biomechanics of seating. Task chairs reflect this research and are making individuals’ lives easier even when they work on a computer the entire day.Keilhauer has produced chairs that feature a pelvis balance point and free shoulder technology. They are truly kind to your back and spine during computer work. Another favorite of ours is Humanscale . It has also taken a great amount of time and effort to study the needs of the human body when it comes to working. If you are in a position where you write or create most of the time, the company’s chairs are an investment you will be thankful for for many years.Consider foot rests, ergonomic mouse instruments shaped to fit your hand and soft keyboard pads that allow rest and relaxation for the wrist, and foot rests. All enhance the work experience and make your time at work less stressful to your body. The goal is make work comfortable for your body and to support the areas of the human form that are brought into play with the work you do.
How can you set up an office to take advantage of the “green” mind-set?
Consider sustainability. Computers contain hazardous materials such as heavy metals, vinyl and toxic chemicals. They also rely on electricity for power. Keep the computer, your printer and other office equipment turned off when idle. Activate power-saving features on your computer. When trading in for new equipment, make sure your home office equipment will be recycled. Avoid throwing office equipment into the trash. A simple internet search will offer many options in your area.
Keep the planet in mind. Eco-friendly design ensures earth-friendly materials. Consider items such as recycled glass countertops and specify materials that use resources most efficiently, such as woods from sustainable forestry and products that are recyclable. Use local and regional resources when available, as this keeps the money local, supports local business and keeps shipping and freight costs (as well as resources used) at a minimum. Also, don’t be afraid to look into ways to integrate energy conservation such as “daylighting,” which takes advantage of natural light. That will not only help you feel better as you work, but it will also help the planet.
What are the best colors for an office?
The psychology of color is real. Certain colors elicit emotional and physical reactions and responses from individuals. Color impacts mood and energy levels. Therefore, be aware of the psychological impact of the color you choose for your home office.
Blues, greens and violets are considered cool colors. These colors evoke feelings of peace and relaxation. Blue can actually make a room feel cooler and can lull occupants to sleep. It’s an ideal bedroom color, but not an ideal office color.
As the dominant color in nature, green is considered a neutral. We are very comfortable in green surroundings. Green evokes organic, fresh, restful emotions and can foster concentration. Today’s new brand images feature a lime green tint that combines yellow hues. This color can add freshness and vitality to an office. The addition of green to an office area will enhance its balance.
Yellow grabs attention. That’s why the most popular highlighters are yellow. It catches the eye like no other color. It makes people happy and evokes optimism. But a bright yellow might be distracting or overpowering in an office area and could even cause a degree of anxiety.
Red is energetic and stirring. It often produces strong feelings and can create excitement. If used in a home office, it should be used as an accent only.
White, ivory, gray and tan can carry subtle variations of color. So they can be neutral with overtones of the colors you feel most comfortable with, such as a warm gray or a cool gray. These colors do not distract and can be combined with accent colors for vitality and energy.
Accents and shades of purple have been proven to stimulate imagination. Purple or lavender tones cross the line between warm and cool tones and can evoke a favorable response when focus and concentration are required.
With all colors, it’s important to test the colors on the wall in large enough areas to ensure compatibility.
There is no real hard and fast formula for color associations. The color blending is subject to the occupant’s wishes.
How would you sum up the concept of home office design?
Make the space your own. Ensure that the space reflects your personality and that you enjoy being there. Ensure that your office reflects you and that it contains a favorite object or photo that will give you the break you need when you pause in your work. It is these small touches that help you make the space your own.
Your office should be a connection to yourself, your spirit and your productivity. It should afford focus rather than distraction and be a place you want to be and want to spend time in. That will positively influence you in the space and enhance the work you do there.
