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. In this article, we’ll demystify its stipulations and answer the question, “do you qualify for a home office deduction?”
If you work from home, deducting a portion of your rent or mortgage payment is incredibly alluring. Taking a home office deduction can significantly lower your tax liability and reduce what you owe at the end of the year if done properly.
How to Know if You Qualify
There are several important guidelines that your home office must meet in order to qualify. The most important factor is whether or not the space you use as your workspace is also utilized for personal tasks. For example, if you work from your kitchen table or couch, you are not eligible to take the deduction. However, if you have a specific room that you use as an office that has no other purpose outside of your business operation, then you may be eligible.
How to Take Your Deduction
If you are eligible for a home office deduction, you may report it on the business schedule of your self-employment tax return. According to Taxbuzz, 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.
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. To do this, simply calculate your deductible amount based on what portion of your home is used for business. 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.
Renting vs. Owning
It is important to note that there are many differences in what deductions you can take based on whether you own your home or rent your space from someone else. In general, homeowners can deduct their mortgage, property tax, homeowner’s insurance, home loan interest, and depreciation, while renters can only deduct rent and renter’s insurance. Both renters and homeowners can deduct maintenance and utilities if using the regular method of calculation detailed above.
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 significantly lower your tax liability.