Can You Take the Home Office Deduction?

If you work from home, you should know about the home office deduction, which may allow you to reduce your tax liability.

What is the home office deduction?

The home office deduction is a type of tax deduction that allows you to deduct the portion of your home expenses that are directly related to your home office. The deduction reduces your taxable business income. This lowers your tax liability, getting you a smaller tax bill (or larger tax refund). However, it’s important to follow the IRS guidelines and keep accurate records of your home office expenses to ensure you’re claiming the deduction correctly.

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Am I eligible?

To be eligible for the deduction, you must be using your home office “regularly and exclusively for business.” That means you don’t use your home office for non-business activities (within reason—a good rule of thumb is to avoid activities that wouldn’t be permitted in a corporate office). Remember, this deduction is all about the expenses you’re paying to maintain an office in order to run your business. That leads into the second requirement: it must be your business. Employees are not eligible. It is not required that your office be in a separate room of the home (it can be in the same room as your bed, for example). However, you’ll still need to define the office area within that room, for the purpose of deduction calculations.

Calculate your deduction

There are two ways to calculate your home office deduction, referred to by the IRS as the simplified method and regular method.

The simplified method

The simplified method is the easier way to calculate your home office deduction. You simply deduct $5 per square foot of your home office space, up to a maximum of 300 square feet. So, for example, if your home office is 150 square feet, you can deduct $750 (150 square feet x $5) from your taxable business income.

The regular method

The regular method is more complex, but it may give you a larger deduction if your actual home expenses are high. You deduct a portion of all your home expenses, proportionate to the size of the office space in your home. Your home expenses include rent, mortgage interest, property taxes, utilities, insurance, repairs, and maintenance. To use the regular method, you need to calculate what portion of your home is used for business, by area. For example, if your home is 2,000 square feet and your home office space is 200 square feet, your home office is 10% of your home’s square footage. So you could deduct 10% of your home expenses from your taxable business income.

Which method should I use?

You’ll likely need to do the calculations with both methods to determine which is the larger deduction. As a rule of thumb, if you’re paying rent or are paying a mortgage with high interest, the regular method will probably be better for you.

How do I claim the deduction?

To claim the home office deduction, you must complete IRS Form 8829, Expenses for Business Use of Your Home when you do your taxes. Taking the home office deduction can draw more attention from the IRS and increase the possibility of a tax audit. So, be sure to follow all the rules and maintain accurate records to support your claim.

Note: Before you take a home office deduction for mortgage interest or depreciation, consider the long-term possibilities. If and when you sell your home, if you claimed the home office deduction, the deduction may affect your capital gains taxes. Keep in mind the depreciation you claimed for your home office may affect the capital gains tax exclusion allowed from the sale of your primary residence. We recommend you consult with a tax professional or review the IRS guidelines carefully.

Tip: Big E-Z makes it easy and affordable to track your business expenses, giving you easy-to-read financial documents that ensure your books are accurate.

Conclusion

The home office deduction can help you save money on your taxes if you work from home. Evaluate your eligibility, choose a deduction method, and make sure you have accurate records of your home office expenses throughout the year.