Are you an entrepreneur using a home office for business purposes? Are you aware of the deduction allowing you to expense the use of this space, and that there are two different ways to calculate it?
The home office deduction is one of the most sought-after (and confusing) tax deductions for small business owners. While it is often misunderstood and misused, the rules surrounding this coveted tax benefit are actually fairly simple.
If you work from home as an entrepreneur, deducting a portion of your expenses is incredibly alluring. Taking a home office deduction can lower your tax liability and reduce what you owe at the end of the year if done properly. The IRS has very specific guidelines as what constitutes the use of your home for business, so let’s take a look at the factors to see if you qualify for this deduction.
There are several important guidelines that your home office must meet in order to qualify. The first factor is regular and exclusive use – this means you can’t use your laptop on the kitchen table, but must have a specific place used only for business purposes. Secondly, your home must be the principal place of business, although there are exceptions if you have a separate location.
Since 2013, the IRS has had two different ways to calculate the home office deduction (originally there was just the actual expense method which is considered to be complicated). Since the simplified method has been introduced, it is much easier to determine the amount of the deduction. But which method should you use?
A simple way to calculate your deduction is to multiply the square footage of the business space within your home, and multiply is by $5/foot. If you are using this method, you are limited to 300 square feet of office space (for a $1500 deduction) and cannot claim other in-home expenses such as utilities.
The actual expense method allows you to write off a proportional amount of expenses based on the percentage of the home used for the business. These indirect expenses generally include mortgage, real estate taxes, utilities, and repairs and insurance. You can also deduct direct expenses such as painting or buying equipment for your space
If your office is larger than 300 square feet or your utilities make up a significant portion of your business expenses, you may want to calculate using the regular method. For example, if your home is 2000 square feet and your office is 250 square feet, then 12.5% of your house is used as an office space. You can then determine the exact amount you are able to deduct based on your housing costs. The benefits of using this method are that you are not subject to a square footage cap and can also deduct applicable expenses.
With the actual expense method, you must keep copies of all paperwork proving actual costs to support the tax deduction taken, which is not required for the simplified method. However, by using the actual expense method, you may be able to deduct more than with the simplified option.
Knowing the guidelines for taking a home office deduction is imperative to make sure that you are filing your taxes correctly and will not be penalized if audited by the IRS. However, if done properly, deducting your workspace costs can be a game-changer for your business and can lower your tax liability.
If you aren’t sure which method to use, contact your CPA and discuss your specific situation.
And if you need assistance with your bookkeeping to make sure you have everything you need to file your income tax return, be sure to contact us at 310-534-5577 or [email protected]. We are ready to assist you with your needs.
