For many people, working from home isn't a choice but a necessity. Fortunately, if you're self-employed and have a home office (and you meet certain requirements), there are deductions that can help offset some of your expenses. If you own a business and have a home office, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes.
The ability to write off your home office on your taxes is a definite perk for business owners, but it's important to know how and when you can do this. So let's go over the guidelines and get you prepared for tax season!
Requirements to Claim the Home Office Deduction
To qualify for the home office deduction, you must meet the following requirements:
1. Business Structure
Your business must be a sole proprietorship, partnership, corporation or S corporation.
2. Exclusively and Regularly
You must use part of your home exclusively and regularly for administrative or management activities of your trade or business. This means that it's used only for business and not for any other purpose (such as a dining room or playroom). You can't use the space for both business and personal purposes.
3. Principal Place of Business
The IRS allows a deduction for a home office if it's your principal place of business, or if you have an office elsewhere but regularly meet with clients or customers at home. If your home has more than one room that qualifies as an office, only one qualifies as your principal place of business—the others must be treated as separate offices.
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Which method should I use to calculate my home office deduction?
There are two ways to figure home office deductions: the Regular Method and the Simplified Method. Both methods can be used to claim a deduction for your home office expenses, but they're processed differently by the IRS.
The main difference is that with the Regular Method, you're required to allocate a portion of your square footage as a percentage of your total square footage at home based on how much time you spend working from home versus working elsewhere. With the Optional Method, there's no need to allocate anything; instead, you have to divide the area devoted to business use by total square footage before multiplying by $5 (the standard deduction rate).
The Regular Method
The Regular Method is the more traditional method, which involves calculating your deduction with a formula. You'll need to determine your gross income from self-employment, business expenses, and other deductible items (such as contributions made on behalf of yourself or others). From this information, you can subtract your net profit for the year and arrive at an amount that represents your allowable deduction for business use of part of your home. This amount is then entered into Form 8829 when filing taxes (Form 1040 is used if you're not self-employed).
The Simplified Method
If you're a small business owner with a small number of employees, you may be able to use the simplified method to calculate your deduction for employee wages. The simplified method is not available to corporations (or S corporations), partnerships, estates, or trusts. This new simplified option can significantly reduce the burden of recordkeeping by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses.
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A Summary of Home Office Deductions
To claim this deduction, you must use part of your home exclusively and regularly for work-related purposes. In other words, you can't simply work from home one day per week—the room or space used must be dedicated to work-related activities. The room doesn't need to be large—it just needs to be dedicated solely (or almost) solely towards working activities. Additionally, in order for it to qualify as an official “home office” under IRS guidelines, the space must not be considered by law enforcement officials as either: A bedroom; A bathroom; A kitchen; Or a family room.
So, there you have it! You can deduct expenses for a business space even if it’s in your home. The regular method and simplified method are two ways to calculate home office deductions. But there are requirements to claim the deduction. For instance, your office space must be used regularly and exclusively for administrative or management activities. In other words, you can’t claim the deduction if part of your office is used exclusively as a guest room or workroom—even if those areas aren’t used regularly by guests.
We hope you appreciate how easy filing for a home office deduction can be. The process is straightforward and simple, and the amount of money you can save makes it well worth your time. If you have any questions about this topic, we urge you to contact us directly. Remember: we’re here to help!
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