The Home Office Deduction: Turning Your Workspace into Tax Savings
During the pandemic, many people began working from home, or managing their entire business from their home. While some workers have returned to the office, you may still be working remote full or part time. If you work from home, whether as a freelancer, entrepreneur, or even part-time telecommuter, the home office deduction can potentially lower your tax bill. However, there are specific rules and requirements to qualify. Let's break down what a "home office" means to the IRS and how to claim this valuable deduction.
What Qualifies as a Home Office?
The IRS uses two main criteria:
Exclusive Use: The space must be used solely for business activities. That guest bedroom/yoga studio combo won't work.
Regular Use: Your home office must be your principal place of business or where you regularly meet clients or customers. Occasional use doesn't cut it.
How to Calculate the Deduction for Your Home Office
There are two methods to choose from:
Simplified Option: This is a more straightforward calculation. You get a standard deduction of $5 per square foot of your home office space, up to a maximum of 300 square feet ($1500 deduction).
Regular Method: This involves calculating the actual percentage of your home devoted to business and applying that percentage to eligible home-related expenses (mortgage interest, utilities, repairs, depreciation, etc.).
Which Method is Better?
The simplified option is easier, but the regular method might yield a greater deduction if you have a large home office or significant home-related expenses.
Eligible Home Office Expenses (Regular Method):
Direct Expenses: Costs solely for your office space (like painting that specific room).
Indirect Expenses: A percentage of your overall household expenses based on the square footage of your office.
Claiming the Deduction
Form 8829: You'll calculate and report your home office deduction on this form, which is then included with your personal tax return (Schedule C for self-employed individuals).
Important Notes:
Recordkeeping is Vital: Document the size of your office space, how it's used, and receipts for any eligible expenses.
Rental Expenses: You might be able to deduct a portion of your rent if you qualify for the home office deduction.
Limits Apply: The home office deduction can't create a loss that offsets other income.
Red Flags for the IRS
Claiming a space that's not exclusively for business: That workout corner in your office won't fly.
Lack of Documentation: If you get audited, prove the legitimacy of your deduction.
Outsized Deductions: Claiming a massive workspace in a small home raises eyebrows.
Should You Take the Home Office Deduction?
For many eligible taxpayers, the home office deduction is well worth pursuing. However, carefully consider the IRS rules and consult a tax professional if you have these situations:
A complex business with significant inventory or equipment needs.
Your home office is a large portion of your home.
You're consistently close to the limits of allowable deductions.
Home is Where the Office Is
If you’re working from home and want to explore the tax savings associated with a home office, we can help. Contact Callison CPA to schedule a free consultation. We will answer all your questions and help you identify the right deductions for your home office.