Has the coronavirus led you to start a business or become your own boss this year? If you are a small-business owner and use part of your home for business, you could save big money on taxes by taking the home office tax deduction, as long as they meet the IRS’s requirements.
Simply put, the home office deduction allows you to deduct a portion of the cost of running your home as a business expense, proportional to the amount of your home you use for business. You can also take this deduction if you have been asked to work at home by your employer.
This can save you a lot of money if done properly – but you need to be careful, as it is one of the most commonly abused tax deductions.
Here’s what you should know about the tax deduction home office.
Who can claim a home office tax deduction?
The tax break is generally available for those who are self-employed, gig workers or independent contractors, not those who are employed by a company that gives them a W-2 come tax season.
Whether you are a homeowner or renter, you may be able to deduct expenses for the business use of your home. The tax deduction home office also is applied for all types of homes, such as a single-family home, an apartment, a condo, or a houseboat. Or even if you convert your garage or barn space as your home office, as long as the structure meets the IRS’s requirements, you can be qualified for a tax claim.
Here are the conditions you’ll need to meet:
Regular and exclusive use:
Taxpayers must exclusively and regularly use part of their home or a separate structure on their property to conduct business.
Principal place of business:
Home office space must follow the principal place of business. That means taxpayers use the space for administrative or management activities, including meeting their clients or customers, storing inventory, keeping books or records, renting out or using it as a daycare facility, according to the IRS.
How to determine your home office tax deduction
If you meet all the requirements mentioned above, now you are eligible to claim the deduction. There are two ways to determine the value of your deduction, the easy way, and the hard way.
With the simplified option, small business owners can claim $5 per square foot for up to 300 square feet of space. More specifically, the IRS gives you a deduction of $5 per square foot of your home that is used for your business, up to a maximum of $1,500 for a 300-square-foot-space.
When you should opt to take the simplified version:
Your home office is 300 square or less.
This method may work well for single-room offices and small operations.
Actual Expense Deduction
The regular method of deduction is a bit more complicated, that is based on the percentage of your home devoted to business use and requires you to keep track of all the actual expenses. The actual expenses, including mortgage interest, insurance, home utilities, real estate tax, general home repairs, are deductible based on the percentage of your home used for business.
Home office tax deduction calculator
If you opt for the regular method instead of the simplified option, the first step is to determine what percentage of your home your office takes up, in terms of square footage. If your home is 1,000 square feet, and your office is 10 feet by 10 feet, your office is 100 square feet and thus encompasses 10% of your home. If you don’t know the square footage of your house, you should check with your local county auditor to see if they have the information on file for your property. Alternatively, if all the rooms in your house are roughly the same size, you can divide the number of rooms you use for business by the total number of rooms in the home. However, calculating the square footage is likely to be more precise.
I’ll give you an example of how you might calculate a home office tax deduction. For our home office of 100 square feet in a 1,000 square foot house, we will use a deduction percentage of 10%.
Here are our expenses for the home for the year:
Mortgage: $1,000 per month x 12 months: $12,000
Electricity: $70 per month x 12 months: $840
Gas: $50 per month x 12 months: $600
Homeowners insurance: $100 per month x 12 months: $1,200
Furnace repair: $2,000
Property taxes: $2,000
The total expense of running the home for 12 months was $18,640. Since our home office was determined to be 10% of the home, we can deduct 10% of the total expense, which would be $1,864.
Don’t forget that you can deduct in full any repairs made to the office specifically – so if we’d spent $200 painting the office, we can deduct that in full. That makes our total deduction $2,064.
When can’t you take the deduction?
Some examples of when you cannot use a home office tax deduction:
You are renting the space in your home to your employer (no double-dipping).
You are working at home for your own convenience (e.g., if you have an office but choose when you want to work at home).
The area is used both for business purposes and personal purposes.
The IRS has produced Publication 587, Business Use Of Your Home, which is the final word on the latest IRS rules for the home office tax deduction. You should check it each year to make sure that the guidelines and limits haven’t been changed. Additionally, you can find more detailed information about how to deduct expenses and whether you should use Schedule A if you are an employee.
The home office tax deduction can save you a lot of money on your taxes. If you’re a small business owner looking to cut costs, now is the time to start pulling out those receipts, utility statements, mortgage statements, or canceled rent checks to figure out how much you’ve spent on keeping your home and home office running.