You work from home, but you don’t have an office in your house. Or maybe you have a home office, but you also have an actual brick and mortar location you work from as well. In both scenarios, you might be wondering if you can claim a home office deduction to reduce your tax liability. And the answer is: yes, you can!
However, there are a few qualifications that you need to meet to be eligible for a home office deduction, but once you do, the benefits can be significant. Here we’ll walk you through the process of qualifying for a home office deduction and how to calculate your deduction amount.
How to Qualify for the Home Office Deduction
If you’re a business owner who works from home, you very well might be able to deduct a portion of your living costs – including your rent or mortgage, utilities, insurance, real estate taxes, and repairs – as business expenses on your tax return. To qualify, you must use a specific area of your home regularly and exclusively for business purposes. You don’t need an entire room, or a fancy work-from-home set-up. As long as you have a dedicated space that you use regularly and exclusively for work, you likely qualify for the deduction.
For example, let’s say you have a room in your house that you use as an office, but also you use part of the room for some other purpose (e.g. exercise room, guest room, etc.). You can still qualify – so long as that portion of the room dedicated to the home office is truly used regularly and exclusively for business purposes.
How to Calculate the Home Office Deduction
Once you know you qualify, the next step in the process is focused on determining how much of a deduction you exactly qualify for.
There are two methods you can use to calculate the deduction: the simplified method and the actual expenses method.
With the simplified method, you calculate the deduction by taking $5 per square foot of your home office space, up to a maximum of 300 square feet. So, a maximum deduction of $1,500. As the name suggests, it’s simple.
With the actual expense method, it’s more complex – but also potentially much more lucrative. Here, you calculate your deduction by taking your overall living expenses (e.g. rent, utilities, insurance, etc.) and multiplying that by the square footage of your home office divided by the total square footage in your home. And then, you can add in any actual expenses directly related to your home office (e.g. furniture, or repairs for only the home office area).
Closing Thoughts
The home office deduction can be a great way to save money on your taxes, but it’s important to make sure you are eligible, calculate your deduction correctly, and document such properly – should the IRS ever come knocking. The home office is one of the most misunderstood and underutilized tax benefits out there – as a business owner, it is a key tax planning lever to pull so long as care and caution is exercised along the way
