The home office deduction allows some taxpayers to deduct certain home office expenses on their tax returns. Employees are not elidable for home office deductions. Independent contractors and self-employed individuals are among those who may claim the home office deduction.
Home Office Deduction Specifications
Before we review the two methods that are available when calculating your home office deduction, let’s review the basics for qualification. The first thing to note is that the deduction is available to both homeowners and renters. As we previously mentioned, employees are not elidable for the deduction.
The taxpayer must have an exclusive space in the home for conducting business on a regular basis. This portion of the home is considered their “home office”. The taxpayer may only take a deduction for that portion of the home and the space must be used exclusively for business purposes.
The home office must also be the taxpayer’s principal place of business. This may include all business activities or if administrative or management activities are conducted in the home office and other business is conducted outside of the home.
Structures that are separate from the home may also qualify for the home office deduction if used exclusively and regularly for businesses.
Two Methods to Calculate your Home Office Expenses
There are two methods taxpayers can choose from when calculating their home office deduction. The method you choose depends upon your unique circumstances.
The Simplified Option
The simplified option uses a set rate of $5 per square foot for business use of the home. Using this method, you can claim $5 for every square foot of your home office up to 300 square feet. If your home office is 300 square feet you can claim a $1,500 deduction. If your home office is more than 300 square feet, you won’t see any additional tax benefits from the additional space.
The Regular Method
If you opt to use the regular method for home office deductions, you will calculate your deductions using the percentage of your home that your home office occupies. Take this percentage from all your home expenses for the year and that will be the amount you claim for your deduction. You may claim a portion of your utilities, mortgage interest, insurance, repairs, and depreciation.
Say you live in a 1000 square foot apartment, and you use a small room exclusively as your home office that is 10 by 10 feet (100 square feet in total). Your business-use percentage would be 10%. This percentage is the amount of each expense you can claim for the home office deduction. If your electric bill was $150 per month, you could claim $15 (10% of $150) per month for 12 months of the year, or $180. This percentage would be used for each expense calculation.
This method requires precise record-keeping throughout the year but may benefit you in the long run.
Filing Form 8829
On form 8829, “Expenses For Business Use of Your Home”, there are two sections for expenses that can be deducted. Indirect expenses and direct expenses. Indirect expenses include bills such as utilities, mortgage or rent and must be allocated between the home office area and the remainder of the home. On the other hand, direct expenses are related solely to the home office and can be 100 percent deducted. These include things like painting or repairs that are done only in the home office space.
Still unsure which method suits your needs? Contact your accountant to discuss how you can claim the most on your home office deduction.