Home office deductions are for business owners to deduct expenses for the business use of their home.
So, if you’re a business owner, and you use part of your home to conduct business then you may be able to claim a home office on your tax return.
This is available to homeowners AND renters and applies to all types of homes.
Download the home office deduction template, to help keep track of these expenses!
WHY IS A HOME OFFICE BENEFICIAL?
With a qualified home office, you can expense some of your otherwise nondeductible expenses. For instance: mortgage interest or rent, home insurance, utilities, etc.
You may qualify for the home office deduction if these two things apply to you:
- Regular and exclusive use
- Principal place of business
REGULAR AND EXCLUSIVE USE
You must regularly use a portion of your home exclusively for conducting business.
This means, if you use an extra room in your house to run your business then you can take a home office deduction for that room.
PRINCIPAL PLACE OF BUSINESS
You must show that your home is your principal place of business in order to claim the deduction.
However, if you conduct business at a location outside of your home, but also use your home significantly and regularly to conduct business you may still qualify for a home office.
Deductions are based on the percentage of your home devoted to business use. There are two methods to use this deduction.
THE TWO METHODS
When calculating the home office deduction, you can either use the regular method or the simplified method.
REGULAR METHOD
The Regular Method allows you to claim a tax deduction based on the percentage of your home office square footage in comparison to your total home square footage. With this percentage, you can claim home-related expenses.
Calculate the home office deduction using the regular method with these steps:
- Determine your home’s total square footage and the square footage of your home office.
- Divide the home office square footage by the total home square footage
- Multiply the percentage by the sum of your home’s allowable expenses (i.e., mortgage interest or rent, insurance, utilities, repairs, etc.)
There is NO maximum to how much you can claim when using the regular method.
The home office deduction template can be extremely helpful to determine this deductible amount!
SIMPLIFIED METHOD
However, there is a maximum when using the simplified method. The maximum home office deduction that you can take with the simplified method is $1,500. Which is $5 per square foot with a maximum of 300 square feet.
The perks of using the simplified method are, of course, because it’s simple! The other highlights include allowing you to claim home-related itemized deductions in full on Schedule A. Also, for the years the simplified method is used, there is no home depreciation or recapture of depreciation.
Typically, if your home office is small, then you will get a slightly larger deduction by using the simplified option. Of course, this does depend on the area that you live in.
If you live in a high-cost area then you may benefit more from the regular method with a small home office. If your home office is bigger, then it may be worth doing the extra calculation and recordkeeping to take the maximum deduction.
Hopefully, this helps you determine if a home office deduction works on your tax return!
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