What is the home office tax deduction and how does it work?
If you run your own business from your home, you may want to consider the home office tax deduction. Your home office may be a room in your home but can also include a structure on your property, such as an unattached studio, barn, greenhouse or garage. If you meet certain requirements, you may be able to deduct eligible business expenses. Eligible direct business expenses can be fully deductible and eligible indirect business expenses can be partially deductible.
It’s important to note that if you’re an employee working remotely rather than a business owner, you likely don’t qualify for the home office tax deduction. A handful of states allow for this tax deduction for employees, but most do not.
Throughout this article, we will take you through the qualifying requirements to claim the deduction and how to calculate what you can deduct.
How to know if you qualify for the home office deduction
If you are a self-employed business owner or you’re an employee in a state that allows for this deduction, you may qualify. To deduct expenses related to your home office, the portion of your home used for your business must be used on an exclusive and regular basis and as your principal place of business.
Wondering what “exclusive and regular basis” means in this context? Consider the “regular use test”: is your home office your primary place of business? If the answer is yes, you’ll likely qualify, as long as you’re self-employed or from a state that offers the tax deduction to employees. But if the answer is “sometimes,” it probably falls under “occasional use” and would not qualify. You could not use this deduction for property used exclusively as a hotel, inn, or similar business.
The biggest roadblock to qualifying for the deduction could potentially lie in the exclusivity requirement. You lose your eligibility to take the deduction if you use the room for both personal and business activities. For example, if you decide you’d like to also use your office as a home gym, you could potentially violate the exclusive-use requirement and forfeit eligibility for home office deductions. Something as trivial as taking a personal phone call in the room wouldn’t disqualify you.
Determining whether your office qualifies as your principal place of business depends on the facts and circumstances. If the room is where you perform your most important business activities and where you spend most of your time while working, and you otherwise qualify for the tax deduction based on your employment status, the more likely it is your principal place of business.
If you’re using your home for storage of inventory products or if it’s being used as a daycare facility, the two criteria above do not apply, but you can still qualify for the home office deduction. Visit the IRS website for more information on the home office deduction for daycare or storage facilities.
How to calculate your home office deduction
Your home office deductions can be calculated in one of two ways: the regular method or the simplified method.
The simplified calculation is a quick and easy way to determine your home office deduction. To determine your deduction, simply multiply your office’s total square footage by $5. The maximum square footage you could deduct is capped at 300 square feet. In turn, the most you could claim is $1,500.
The regular option allows you to determine your deduction by using your actual expenses. You start by determining the square footage of your home office and dividing it by your home’s total square footage. This gives you your deductible percentage. Direct business expenses may be fully deducted, and indirect expenses will be multiplied by your deductible percentage to determine the value you can deduct. Direct business expenses would include any expense for only for the area being used for business. An Indirect expense would be expenses for maintaining the entire home, such as insurance, utilities, or general repairs.
You may want to speak with a tax professional to determine which method would work best for your tax situation.
This article is for educational purposes only and should not be taken as tax advice. Speak to a licensed tax professional for tax advice.
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