The home office deduction is a tax benefit that can lower your taxes if you use part of your home for your business. The home office deduction allows individuals who use part of their home exclusively for business purposes to deduct related expenses on their taxes. This can include employees, self-employed individuals, freelancers, and small business owners, provided they meet the qualification criteria.
To qualify, you need to meet two main rules:
- Exclusive Use: The space must only be used for your work. For example, if you’ve turned a spare bedroom into an office for your online business, you can claim it. However, if your kids also use it for homework or playtime, it wouldn’t qualify.
- Regular Use: You need to use the space frequently for work, not just occasionally, and the entire square foot of the home.
Example:
Let’s say John runs an online consulting business from his home. He uses a 10×10-foot room (100 square feet) exclusively as his office. His entire home is 1,000 square feet, so his office makes up 10% of his home. John has two options to calculate his deduction:
- Simplified Method: John can claim $5 per square foot for his office. Since his office is 100 square feet, he can deduct $500 (100 sq ft × $5).
- Actual Expenses Method: John chooses to calculate based on his actual expenses. Over the year, he spent $15,000 on rent, $2,000 on utilities, and $1,000 on repairs. Since his office is 10% of his home, he can deduct:
- Rent: $15,000 × 10% = $1,500
- Utilities: $2,000 × 10% = $200
- Repairs: $1,000 × 10% = $100
- Total Deduction: $1,500 + $200 + $100 = $1,800
- John chooses the Actual Expenses Method because it gives him the larger deduction. Items you can typically include but not limited too
- Utilities
- Internet Service
- Rent
- Mortgage Interest – located on form 1098
- Property Taxes – located on form 1098
- Homeowners or renters Insurance
Don’t worry about the calculations
There’s no need to stress about figuring this out yourself. The software we use at Waldman Accounting will automatically calculate the deduction and ensure we use the method that provides the best benefit. We will handle the details so you can focus on running your business.
Tips for maximizing your Home Office Deduction
- Keep Detailed Records: Maintain receipts and documentation for all expenses related to your home office. This includes utility bills, repair invoices, and a floor plan showing the size of your office space.
- Consider Depreciation: If you own your home, depreciation can significantly increase your deduction. However, keep in mind that claiming depreciation may impact capital gains tax if you sell your home.
- Regularly Review Eligibility: Ensure that your home office meets the exclusive and regular use criteria throughout the tax year.
- Consult a Tax Professional: Tax laws can be complex. A tax professional can help ensure you are maximizing deductions without triggering an audit.
Avoid duplication on your Profit and Loss Statement
We strongly recommend that you do not include home office expenses (like rent or utilities) in your profit and loss statement. These costs should be recorded separately for the home office deduction. Including them on both your profit and loss statement and your home office deduction could result in double-counting expenses – leading to inaccurate financial records and potential issues with the IRS.
Keeping the home office deduction separate ensures your financials are clean, accurate, and compliant with tax laws.
The home office deduction is a great way to reduce your tax liability if you qualify. By understanding the rules, keeping detailed records, and choosing the right calculation method, you can maximize your savings while staying compliant with tax laws. Whether self-employed or working remotely for an employer, the home office deduction is a worthwhile consideration each tax season.
Let Waldman Accounting help you manage home office expenses properly!