Tax Deductions for Home Office: All You Need to Know

tax deductions for home office

Not all business owners can afford the luxury of a dedicated office building. Well, not at the start anyway. Even Apple and Microsoft were started from a home garage before they shot up big. When you operate your small business from home, you can gain some deductions for home office and save big on your tax payments.

Small business owners who use a part of their home for business can acquire tax benefits by taking the home office deduction. That’s right and qualifying for it is quite simple as well.

In this article, we’ll look at everything you need to know about tax deductions for home offices and how you can benefit from them.

Additional Reading:

15 Tax Deductions for a Small Businesses Owner

Small Business Ideas from Home: 14 Business Ideas for 2022

What Constitutes a Home Office?

A home office is a part of one’s residence delegated exclusively for business purposes. There’s a big chance that you might have a home office yourself since you are reading this. You can have a home office in almost all types of houses, yes, even those you’re renting.

Home offices are mostly set up by people who work from homes such as freelancers, consultants, or independent contractors. People find home offices quite beneficial, and the reasons for it are clear.

A home office cuts down many recurring costs such as transportation expenses, commute costs, etc. There’s no wonder why it’s one of the most popular deductions for self-employed.

Simplified Version vs. Actual Expense Deduction

There are mainly two methods of home office tax deduction, the simplified option, and the actual expense deduction method.

Simplified option

Taxpayers can take advantage of a streamlined method for calculating the deduction for business use of their home beginning in the tax year 2013 (returns filed in 2014).

This simplified alternative does not alter the eligibility requirements for claiming a home office deduction. Please note. Allowable deduction computation and recordkeeping requirements are simplified by this measure.

Terms of this method:

  • Deductions for home office for small businesses are generally set at $5 per square foot (maximum 300 square feet).
  • On Schedule A, all the home-related itemized deductions that are allowed. Examples include: mortgage payments and property tax.
  • In years when the simple option is utilized, no deductions or subsequent recovery of depreciation are available.

Regular method of deduction

This is a bit more complicated than the simplified expense method. Instead of utilizing the optional technique, taxpayers using the regular method (required for tax years 2012 and previous) must figure out their real home office costs. Mortgage interest, insurance, utilities, repairs, and depreciation are just examples of these costs.

Deductions for home offices are often dependent on the percentage of your house that is used for business purposes. It’s important to figure out how much space you’re dedicating to running your business, even if it’s only one room.

Which one’s better?

Depends upon the situation. If your home office is single-room and conducts smaller operations, then the simplified method is the way to go. The actual expense deduction method, on the other hand, will be more suitable in case your home office takes a larger part of your home. One thing certain is that either method will provide you with tax benefits.

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Who Can Claim This Deduction?

One must meet certain requirements to become eligible for a home office tax deduction. The most obvious one is that the person must be self-employed, and not employed by a company.

IRS has stated that – “Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home”.

Here are IRS’ requirements to claim Home-Office deduction:

  • Regular and exclusive use – The part of your home you’re using for your business must be exclusive to your business activities only. In case you’re found to be using that property for any other activities then you might end up losing your eligibility. You would need to make sure that your home office is used regularly and exclusively for business activities.
  • Principal place of business – Tax deductions for home office require your home office to be the principal place of your business. That means all the work related to your business such as management activities, appointments, and consultations must be conducted at your home office.

Things to watch out for

Despite the myriad of benefits offered under deductions for self-employed, there are some risks to be faced here as well. Watch out for the following things when you are claiming deductions for home office in your tax returns.

  • Risk regarding home sales – If you’re a homeowner, then taking the home office tax deduction could make it difficult for you to sell your home in the future. It could even prevent you from profiting capital gains tax when selling your property.
  • Receipts – If you’re going to use home office deduction, then make sure to keep a record of all your receipts such as various bills and utility costs. Doing this will help you back up your claims in case you’re audited by the IRS.
  • Depreciation – Deductions for home office require you to depreciate the value of your home. According to IRS, the depreciation you’re required to take in-home office deduction is related to capital gains tax when you sell your home.
  • Apprehension – The last one is something you need to watch out for before you claim the deduction. Just don’t let the fear of an IRS inspection stop you from claiming the home office deduction (or other deductions for taxes). Just make sure you have complied with all the provisions and

Tax Deductions for Home Office

Deductions for taxes can help lower your tax payments significantly. Home office tax deduction could become one of the major contributors in your efforts to get a big IRS refund.

Tax deductions are your rightful incentives and claiming them can help save you a lot of money for your small business. This is critical for all small businesses as they can always benefit from any type of monetary incentive. Make sure you use it well.

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