Overhead costs and tax liabilities can add up pretty quickly, even if you work from home. If you haven’t heard about or taken advantage of the home office tax deduction, you could be missing out on a great way to reduce your tax liability.
The home office deduction isn’t for everyone who works from home, though. Find out who can claim home business deductions, how much you can claim, recordkeeping requirements, what forms you need to file, and more.
What is the home office tax deduction, and can you claim it?
The home office deduction is a tax deduction qualifying small business owners can claim if they use part of their home for business. You can only claim the portion of your home that you use for business, which is discussed later.
The deduction helps you cover the costs associated with your home office, such as mortgage interest, rent, insurance, utilities, and maintenance.
Taking the home office expense deductions reduces your tax liability, which could save you a significant amount of money.
Who qualifies for the home office tax deduction?
You can claim the home office deduction if you follow two rules:
- You use the space regularly and exclusively for business
- The space is the principal place of your business
The IRS’s regular and exclusive use rule indicates that your home office is used only for business. For example, you can’t claim a deduction for a room that doubles as your workspace and weight room.
Although you can conduct business in more than one location (e.g., meeting a client for lunch), the second IRS rule requires that your home office is your primary place of business. Consider how much time you spend doing work at your home office and the importance of the work you do there. If you use your home office space for administrative or management activities, it is considered the principal place of business.
What does the IRS define as a home?
You can claim the home office tax deduction regardless of if you own or rent your home. According to the IRS, home is defined as a house, apartment, condo, mobile home, boat, or similar property.
Free-standing buildings like unattached garages, barns, and greenhouses count as home offices, too. To claim a home office deduction for a free-standing building, you must use it regularly and exclusively for business. However, it does not need to be your principal place of business.
Can you claim the home office tax deduction?
Claiming home office expenses
You can claim the home office deduction by using the simplified method or the actual expense method.
Some business owners decide which method to use based on which gives a better deduction. Learn more about each method below.
The simplified method is easier than the actual expense method. To use this method, multiply the square feet of your home office space by the standard deduction rate of $5.
Keep in mind that you can only claim up to 300 square feet for your home office. Therefore, the maximum amount of your tax deduction is $1,500.
Your deduction must be less than the amount of your gross income (from business use of your home) minus business expenses. And, you cannot deduct depreciation on the portion of your home used for business if you use the simplified method.
Let’s say your home office is 250 square feet. Using the standard deduction rate of $5, you could claim $1,250 (250 X $5).
Actual expense method
The actual expense, or regular, method lets you determine how much you actually spend on your home office.
To use this method, calculate the actual expenses of your home office, including mortgage interest, insurance, utilities, repairs, depreciation, and rent.
Next, you need to calculate the percentage of your home that is used for business.
Once you have determined the percentage of your home used for your business and how much your expenses are, multiply the two figures together.
For example, you have $15,000 in annual expenses for your home. Your home office takes up 15% of your house. Using the actual expense method, you could deduct $2,250 for your home office expenses ($15,000 X .15).
You can also claim a depreciation deduction on the portion of your home used for business if you use this method.
Forms you need to file
If you are self-employed, use Schedule C (Form 1040) to report your expenses. Report your expenses on line 30.
If you claim the home office tax deduction using the actual expense method, you will also need to attach Form 8829, Expenses for Business Use of Your Home.
To claim the home office tax deduction, you need to have accurate and organized records. Your records must show the part of your home you use for business. And, keep records showing that you followed the IRS’s two home office tax deduction rules.
If you decide to use the actual expense method, you will need to stay extra organized. Store receipts to back up your expense claims. And, you must be able to show depreciation.
Keep records for either three years after filing your return or two years after the tax was paid, whichever is later.
Want to store your records in one place? Patriot’s online accounting software lets you easily track your expenses. It’s made for the non-accountant, making it the perfect solution for busy small business owners. Get your free trial today!
This is not intended as legal advice; for more information, please click here.