Save Big Time On Taxes: How To Do Your Home Office Deduction Right

 

We cannot get out of paying taxes but there is no need to pay the IRS more than you need to! Most small business owners average about 20% of their gross income per year in taxes, but you can reduce that figure by leveraging deductions. As an entrepreneur, you may be able to use the home office deduction to your advantage to save on your taxes.

In this article, I’m sharing why the home office deduction is something you should be including in your tax returns, the IRS regulations about the home office deduction, and how to do it to get the most benefits for your business.

 

Disclaimer: This material has been prepared for general informational purposes only. It is not intended to provide, and should not be relied on for, tax, financial, or accounting advice. Please consult your tax, financial, and accounting advisors before engaging in any transaction.

 

Save on Taxes with a Home Office Deduction

Are you a self-employed person who works from home? You could be saving hundreds or even thousands on your taxes by using a home office deduction!

For small business owners, entrepreneurs, and folks who are otherwise self-employed, your home office could be a big deduction on your tax return to lower your final tax bill. It is a way to funnel some of your life and home expenses into your business and enjoy the tax savings that come from it.

 

Who is Eligible for the Home Office Deduction?

If you use a part of your home to run your business, you could be eligible for the home office deduction. This deduction can be applied to any type of home such as a house, an apartment, a condominium, a mobile home, or even a boat. It can also apply to separate structures on your property such as a studio, garage, or barn. Renters and homeowners can apply for the home office deduction.

Employees are not allowed to apply for the home office deduction. The exception to this is if you are an employee of your own S corp or C corp, in which case you can claim the home office deduction in a slightly different way (more on how to claim your home office deduction as an S Corp owner below).

 

What are the IRS Rules for Home Office Deduction?

Generally speaking, the IRS allows entrepreneurs and business owners to claim the home office deduction on the part of the home they use for business, subject to some restrictions. First, the space needs to fulfill the requirement of regular and exclusive use by the business. Second, the space needs to be the principal place of business.

Commonly, this is a dedicated home office space that you may be using to run your business. It could be a spare room in your home that you have converted into an office space, a portion of your basement that you use to store inventory or office supplies, or a studio or garage on your property that you use for your business. The important thing to note is that this space must not be shared by anyone else, nor can it be used for tasks other than running your business. 

You must also meet the requirements that your home office is your principal place of business. This means that you conduct a significant portion of administrative and management tasks (e.g. bookkeeping, setting appointments, writing reports) in your business from there, and you do not have another location that you use for a substantial amount of such tasks.

 

Can You Claim the Home Office Deduction?

Here are some examples of common scenarios that may apply to your situation:

• If you use your dining table as your desk to send client emails, that cannot be claimed as part of your home office deduction as you also use it to eat meals. 
• An office space in your home that your partner also uses as their home office also fails the “exclusive use” test for the home office deduction. 
• You use a closet in your basement to only store products and items related to your business in your basement. You can claim this space as part of your home office deduction.
• You often use a coworking space to take business meetings, but you still send invoices and perform other administrative tasks from a separate and dedicated home office space. You can claim the home office deduction on the office space in your home because it fulfills the requirement of being the principal place of business.
• You rent an office space that you use 3 days a week, and you work from a separate and exclusive space in your home on the other 2 days of the week. You may not qualify for a home office deduction because your home office may not meet the requirement for being the principal place of business.

The IRS even has a handy flow chart to help you determine if you can qualify for a home office deduction on your taxes. 

 

Note: Specific use cases may vary. Please consult with your trusted tax professional to verify that you are eligible to claim the home office deduction on your taxes.

 

How do you Calculate the Home Office Seduction as a Small Business Owner?

If you meet the IRS requirements with your current home office setup, congratulations! If not, simply create a small space in your home demarcated for the regular and exclusive use of your business. It does not need to be an entire room or even limited by a permanent structure, but it does need to be separately identifiable.

Once you have your home office set up, you can calculate the home office deduction using the simplified or regular method of deduction, depending on which would work best for your situation.

 

Home Office Deduction Simplified Method

The easier option to do your home office deduction is to use the simplified method. Using this method, you would simply measure the space that your home office occupies in square feet. Then, multiply that by the prescribed rate of $5 to get your total home office deduction. The limit for home office deductions using the simplified method is 300 square feet – a maximum deduction of $1,500.

Using this method is simple and straightforward. Recordkeeping is much less tedious and it is a simple process to calculate your deduction. However, this method often results in a lower deduction amount as you are not allowed to deduct actual expenses (e.g. rent or mortgage, utilities, interest) or depreciation of the property.

 

Home Office Deduction Regular Method (Actual Expenses)

A slightly more involved method to calculate your home office deduction is using the Actual Expenses (Regular) method. Start by measuring the square footage of your home office space. Divide that by the square footage of your entire home to get a percentage. You can now apply this percentage to all relevant qualifying expenses to calculate your home office deduction. 

Qualifying expenses can be direct (expenses only for the part of your home used for business) or indirect (general expenses for upkeep and maintenance of your entire home). Direct expenses such as painting the walls of your home office are fully deductible, while indirect expenses such as rent, utilities, internet, and housekeeping services can be deducted based on the percentage previously calculated.

Using the regular method to figure out your home office deduction allows you to funnel personal expenses into your business and reduce your final tax bill. However, this method requires much more extensive and tedious recordkeeping. You will also need to record all expenses on a separate tax form in a particular way for it to qualify as your home office deduction.

 

 

Home Office Deduction for S Corp Owners

As an S Corp Owner, you are technically an employee of your business and so cannot claim the home office deduction. However, if you use a part of your home for business-related tasks, you can still reduce your taxes by leveraging the accountable plan.

Instead of a home office deduction on your taxes, you would receive a business expense reimbursement as an employee of the corporation. Similar to the Actual Expenses method, you will need to keep track of and record all direct and indirect expenses related to your home office.

Because this is not a deduction like the home office deduction for sole proprietors and owners of LLCs, other rules apply as to how this should be executed. For more details on how to claim this deduction as an S corp owner, please consult with your tax professional.

 

Is the Home Office Deduction Worth It?

As a small business owner who runs my business from my home office, my simple answer is YES. It can be a huge deduction on your tax return and can reduce the amount you pay in taxes by a significant amount.

If you are running your business out of your home and you are not claiming this deduction, you are missing out. Particularly if you choose to use the Actual Expenses method to calculate your home office deduction, you will be saving a substantial amount on taxes – even though it requires you to keep detailed records of your expenses and save your receipts.

However, be careful when claiming the home office deduction! Because it can be a way to save a substantial amount on your taxes, the IRS does pay close attention to home office deductions. In fact, it is one of the common red flags that can trigger an IRS audit if done incorrectly!

Care to tap into this deduction and apply it to your next income tax return to save big time on taxes without triggering an audit? There is an easy way to do it!

 

The Home Office Deduction Calculator was designed with entrepreneurs and small business owners like you in mind. Clear, straightforward, and easy to implement – this spreadsheet provides you with everything you need to get your home office deduction organized without triggering an IRS audit! Never worry about calculating your home office deduction again – get your Home Office Deduction Calculator now!