Home office deduction explained

Working from home has become increasingly common in recent years, and with the current global situation, it has become a necessity for many. If you are one of the millions of people who have set up a home office, you may be eligible for a home office deduction on your taxes. In this blog post, we will explain what the home office deduction is and how you can take advantage of it.

What is the Home Office Deduction?

The home office deduction is a tax benefit that allows self-employed individuals and employees who work from home to deduct certain expenses related to their home office from their taxable income. This deduction can help reduce your overall tax liability and put more money back in your pocket.

Who is Eligible for the Home Office Deduction?

To be eligible for the home office deduction, you must meet certain criteria:

• You must use a specific area of your home exclusively for business purposes.
• Your home office must be your principal place of business or a place where you regularly meet with clients or customers.
• You must be self-employed or an employee who works from home for the convenience of your employer.

What Expenses Can You Deduct?

When it comes to deducting expenses for your home office, there are two main categories:

1. Direct expenses: These are expenses that are solely for your home office, such as office furniture, equipment, and supplies.
2. Indirect expenses: These are expenses that are related to your entire home, but can be allocated to your home office, such as rent or mortgage interest, utilities, and homeowners insurance.

It's important to note that you can only deduct the portion of these expenses that is directly attributable to your home office. For example, if your home office takes up 10% of your total square footage, you can deduct 10% of your rent or mortgage interest.

How to Calculate Your Home Office Deduction

There are two methods you can use to calculate your home office deduction:

1. Simplified method: With this method, you can deduct $5 per square foot of your home office, up to a maximum of 300 square feet.  

   To use the simplified method for home office deduction, simply multiply $5 by the square footage of your home office. 

   For example, if your home office is 150 square feet, you will multiply $5 by 150 square feet, for a $750 home office deduction. The maximum square footage allowed for this method is 300 square feet and the maximum total deduction for this method is $1500.

2. Regular method: This method involves calculating the actual expenses of your home office and prorating them based on the percentage of your home that is used for business purposes. 

   
   

   Essentially, you’re deducting the amount of your home expenses that are dedicated to running your business, as a business expense. Any “direct” expenses that are only for your home office can be deducted in their entirety (such as a repair that only needs to be made in your office).

   For example, if your home is 1,500 square feet, and your office is 300 square feet, your office takes up roughly 20% of your home. This entitles you to deduct 20% of the expenses mentioned in the previous section, including 20% of your rent or mortgage, renters insurance or homeowners insurance, utilities, etc. You can download and fill out Form 8829 (which is the actual tax worksheet) to make sure you don’t miss adding any expenses.

It's a good idea to consult with a tax professional to determine which method is best for your specific situation.

Recordkeeping and Documentation

When claiming the home office deduction, it's essential to keep accurate records and documentation to support your claim. This includes:

• Receipts for office furniture, equipment, and supplies
• Utility bills
• Proof of rent or mortgage payments
• Any other relevant documentation that demonstrates your home office expenses

Having these records readily available will make it easier to substantiate your deduction if you are ever audited by the IRS.

Keep track of all home expenses

‍Since you can deduct a percentage of most home expenses using the regular method, make sure to keep a log throughout the year so you don’t lose track of anything. Keep your receipts and consider starting a spreadsheet so that you always have your home office deduction documentation on hand. Spend a little time each month logging your utilities, rent, insurance, and other expenses so that when it comes time to submit your taxes, you won’t forget about any of the expenses you incurred throughout the year.

Tips for maximizing your deduction

If you’re a small business owner that works from home, claiming the home office deduction can help you save money so that you can reinvest in your business or your personal life. So, it makes sense to try to maximize it wherever possible to improve your savings. Here are a few things you can do to make sure you’re getting the largest deduction:

Try both methods

When it's time to calculate your deduction, use both methods to see which one results in a larger amount. Although it may take some time to calculate your deduction with the regular method, it’s worth doing the exercise to see if it yields a larger deduction.

Create a dedicated home office space

‍If you currently work in an area of your home that doesn’t qualify for the home office deduction (such as your kitchen table, couch, or bedroom), consider carving out a small space. Transform a closet, a corner of your apartment, or even a built-in bookshelf into a desk and use it to help run your business. It’s easy to think that you can’t qualify if you don’t have an extra room available, especially if you live in a small space, but even a very small desk space is considered a home office. 

How do you claim the deduction? 

You claim the home office deduction by completing both Form 1040, Schedule C and Form 8829. 

If you use the simplified method to determine your deduction amount, you only need to complete Form 1040, Schedule C. Simply write your deduction amount on Line 30.

If you use the regular method, you will need to complete Form 8829 (Expenses For Business Use Of Home) to determine your deduction amount. The form is relatively straight forward and provides a line for each home expense (including home office depreciation). You can reference the IRS instructions for the form to get additional tips on how to fill it out if needed. 

After completing the form, your total deduction will be on Line 36. Write this amount on Line 30 of Form 1040, Schedule C.

Conclusion

The home office deduction can be a valuable tax benefit for individuals who work from home. By understanding the eligibility criteria, deductible expenses, and calculation methods, you can take full advantage of this deduction and potentially reduce your tax liability. Remember to consult with a tax professional to ensure you are maximizing your tax savings and complying with all applicable tax laws.