Home Office Deduction 101
Are you a self-employed individual who works from home?
You may be able to save money come tax time by deducting some of your household expenses associated with running your business.
To be eligible for the home office deduction your office must be used regularly and exclusively as your principal place of business.
Your principal place of business means that you should meet clients in your home, process billing and invoices, and predominately manage your business there.
You should have a defined area for your office - a spare bedroom, a corner in your basement, a detached structure in your backyard. Walls around the space are not required, but you can’t simply claim the kitchen table or a space that doubles as a playroom because you’ll do your work there from time to time. The most common exception to this rule exists for daycare providers that operate in their home.
The deduction is available to renters and homeowners.
The following steps will guide you in claiming the deduction.
First, you must determine the square footage of your office space. After that you can determine your deduction in one of two ways:
1. Simplified Method: If your office space is equal to or less than 300 square feet. You can figure your deduction by multiplying the actual square footage of your office by $5. For example, if your space is 100 square feet, then your deduction would be $500.
2. Actual Expenses: After determining the square footage of your office, figure out the percentage of office space relative to your home. For example, if your office is 300 square feet and your home is 2,500 square feet, then your office takes up 12 percent of your home.
You’ll use this percentage to determine the portion of expenses you can deduct. For example, if your electricity bill for the year was $1,000. Twelve percent of $1,000 is $120. You can deduct $120 in electricity payments as part of your home office deduction.
What are some of the qualifying expenses?
- Rent payments
- Mortgage payments and real estate taxes (You can only deduct these as part of your home office deduction if you’re itemizing deductions on Schedule A and you haven’t exceeded the limits.)
- Utilities and services: internet, electricity, telephone, trash removal, security system, etc.
- Depreciation if you own your home
- Other expenses like maintenance or repairs specifically for the benefit of your office space (ie. paint or window replacement) can be fully deducted.
Ensure that you keep records for your expenses.
Consider reaching out to a tax preparer to help you with your home office deduction. Depreciation and basis in your home can be confusing topics that if not understood can result in a surprising tax liability down the road.