How Do I Calculate My Home Office Deduction?

October 1, 2021
Main post image

Some people have been working out of their homes for many years, while others have had to establish a home office recently. Working from home has gone from a luxury to a necessity due to the coronavirus pandemic.

Working from home brings its own opportunities and complications as well. It can be a challenge to create a practical home office space where you can be productive and avoid distractions. Many people have struggled to adapt as they move out of the office environment and into a home office. 

On the other hand, an established home office may allow you to deduct related home costs as business expenses. This deduction can make quite the difference for your tax planning if you qualify, but it requires following strict requirements regarding the use of your home office and how you measure it. 

Who Qualifies for a Work From Home Deduction?

You must be self-employed to qualify for the home office deduction. This is a benefit business owners can claim as a tax-deductible small business expense, which means it is not available for employees of another business.  

However, self-employed people can claim this deduction if their workspace meets the IRS definition of a home office. It applies to all types of homes, regardless of if you are a renter or a property owner. 

But to qualify as a home office, your workspace requires exclusive and regular use by your business, and it must be your principal place of business.  

What is “Exclusive Use”?

Exclusive use means you must use your home office for business purposes and business purposes only. This cannot be a multipurpose space used by you or others for leisure or unrelated work. To qualify for this deduction, it must be a space entirely reserved for your work. 

If you regularly work at your kitchen table or in your living room, this does not qualify as a home office. For the sake of this tax deduction, but also your productivity, you might consider carving out a dedicated workspace within your home in the future.  

What is “Regular Use”?

Regular use implies that you use your home office on a regular basis. This doesn’t mean you always have to be there when working, but it must be used as an office. You might frequently meet clients at your home, or perhaps your home office is your dedicated space for taking care of your administrative and freelance bookkeeping needs.

What is a “Principal Place of Business?”

Not only must your home office be used regularly, but it must play a central role in your work life. IRS requirements for the home office deduction say the home must be your principal place of business but that you can still carry on substantial amounts of business outside the home. 

Essentially this means that your home cannot be simply a casual or occasional place for doing your work. 

How to Calculate the Home Office Deduction?

If you and your small business are eligible for the home office deduction, you have two different options for calculating the exact amount. There is the regular method, and then there is the simplified option. The simplified option will provide you a quick overall estimated cost, but it might not benefit you as much as the regular method’s itemized approach. 

Simplified Option

The simplified option was instituted to allow for less stringent and time-consuming recordkeeping and calculation when calculating the home office deduction. Assuming you meet the requirements for the deduction, all you have to do with this route is find the exact square footage of your dedicated home office space. 

For each square foot of your home office, up to a maximum of 300 square feet, you will receive a standard deduction of $5.  

Regular Method

The regular method requires you to calculate actual total costs for your home office space. Generally, this means adding up all of your total home costs. Here are a few of the expenses this includes: 

  • Regular rent payments
  • Mortgage interest payments
  • Property taxes
  • Utilities like heating, water, and electricity costs 
  • Repairs in the office space or general housing maintenance 
  • Home insurance premiums
  • Depreciation
  • Other eligible operating expenses or losses
  • Other vital costs required for office operation, including high-speed internet 

Having added up the total costs, you then must determine how much applies to your home office. For most expenses like heating, rent, mortgage interest, and insurance, that means dividing the total cost according to the size of your office in relation to your entire home. Find out what percentage of your home is taken up by your office and use that to divide these costs. 

Using the regular method may mean a much higher total deduction, but it requires much more effort and paperwork to establish. The simplified option does not allow you to claim specific home office expenses like depreciation

Contact 1-800Accountant to Maximize your Home Office Deduction

While it may be tempting to choose the simplified method of calculating your home office deduction, you may miss many opportunities to save more money. Consider working with a professional accountant if you’re intimidated by the effort involved or worried you don’t know enough to follow IRS requirements.

A tax consultant can help your small business fly through this process and maximize your savings. You don’t have to learn how to calculate depreciation and fill out a tax return because that’s not your job. Focus on your business and let an accountant do the bookkeeping legwork for you.  

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.