If you work from home, you could potentially stand to benefit from the Home Office Deduction, and this post will help you figure out if that is the case.
Home office deductions can be a helpful way to lower business costs and shorten your commute to the office. However, it is important to understand the rules for a home office deduction and when it comes into play.
Home Office Deduction Rules
It is important to note right away that if you are a W-2 employee you cannot claim a home office deduction. The rules around this changed in 2018, and now employers can give an employee an allowance for home office and other expenses and, most of the time, the reimbursements you receive for your home office are not taxable.
Qualification #1: A qualified business
To take a home office deduction you’ll first need a business with positive net profit. The business can set up as an S Corp, LLC, Partnership, C Corp or a Sole Proprietorship.
Qualification #2: A room used exclusively as an office.
To qualify for the deduction, the home office you have must be used exclusively as a work space for the business. It could be an office, a small manufacturing room, or room for a desk, computer and storage for things like marketing signs or materials. The important thing to keep in mind is that you must meet the burden of exclusive and regular use of that room as your primary work/office space.
It is worth noting here that you will be disqualified from taking a home office expense on your business tax return if you have an office available. For example, if I’m a business owner and I have an office where 10 people work but I choose to work from home, that does NOT qualify. Chances are if your business pays office rent the IRS or your State won’t allow both a home office and Office Rent/Lease expense. You can pick on or the other but you can’t have both.
Qualification #3: Properly calculate the amount and keep it on file
Another key aspect of claiming this deduction is keeping accurate records to substantiate your home office expenses. This includes keeping records of bills, receipts, and any documents that support your claim.
Finally, the amount you can deduct is subject to certain limitations based on your business income. Keep in mind for a Sole Prop or Schedule C business, the home office deduction cannot put your net income into the negative.
Home Office Deductions by Business Type
While the home office deduction may be available for many different business structures, the method for calculating the deduction will vary depending on business structure.
For S Corps, the individual must pay the expenses, and the company has to reimburse S Corp owner directly each month. This is called the regular method, see below for an example.
If the business is a Partnership you are reimbursed by the partnership, same as an S Corp owner, using the regular method.
Sole Props use the simplified method, which shows up on the 1040 at the bottom of the Schedule C.
How to Calculate the Home Office Deduction
As mentioned above, there are two methods to calculate the home office deduction: the simplified option and the regular method. The simplified option allows you to deduct a standard amount per square foot of your home office space, while the regular method involves calculating actual expenses related to your home office (such as a portion of rent, mortgage interest, utilities, and maintenance costs).
If you use the regular method, you can potentially deduct a portion of expenses such as mortgage interest, property taxes, rent, utilities, insurance, and home maintenance that relate to the home office space. With the simplified option, you can only deduct a predetermined amount per square foot.
If you are interested in calculating the deduction for yourself, we have created a spreadsheet that we share with our clients and you can access that here.
Example of Regular Method
You have read the information above and you believe you qualify for the home office deduction. The first step is to complete the home office deduction worksheet. You enter the annual costs associated with your home into the worksheet (i.e., home mortgage interest, landscaping, real estate taxes, etc.). Next, you enter the total square footage of your home and the total square footage of the area you use solely for your home office. Finally, this will tell you the percentage of these expenses that is used by the business. This is the amount you can deduct monthly. Below is an example of the blank worksheet and what it looks like completed.
Things to keep in mind
Tax laws can be complex, and claiming a home office deduction can trigger specific audit scrutiny. It’s advisable to consult a tax professional or CPA to ensure you’re following the rules correctly and maximizing your tax benefits.
Please note that tax laws and regulations can change, so it’s important to stay up to date with the latest information from the IRS or consult with a tax professional who is knowledgeable about the most current rules.