If you are a business owner that does ANY work from home, and you’re NOT taking the home office deduction… then you’re probably paying more than you have to in taxes to the IRS.
But don’t worry, you’re not alone… More than 2 million people overpay the IRS every year.
So if you want to keep doing that, then don’t read the rest of this post.
BUT, if you want to take the home-office deduction on your tax return, then read on as we are going to give you all of the information you need to do this correctly in this post.
All you have to be is a business owner or independent contractor – meaning you receive 1099 income, or in other words, the income you receive is not taxed upon receipt.
If that’s you, and you work from home, then get ready to lower that tax payment to the government.
In today’s post, we’re going to help you do this with the home office deduction.
We’re not only going to tell you what this deduction is, but we are also going to go over a calculation in this post.
Alright, so let’s jump in!
What is the Home Office Deduction?
According to the IRS, the home office deduction allows QUALIFYING taxpayers to deduct CERTAIN home expenses from their tax returns.
Now of course this is the IRS we’re dealing with, so we need to make sure exactly what they mean by “QUALIFYING” taxpayers and what “CERTAIN” home expenses you can deduct.
By the way, when we say deduct, we mean lower your taxable income.
So for example, if you made $10,000 in income, and deducted $1500, then you’d only pay taxes on the remaining $8,500.
Who Qualifies For This Home Office Deduction and What Can You Deduct?
Here are the individuals who qualify – first of all, all homeowners and renters qualify for the home office deduction, as long as you are not trying to claim the deduction as an employee.
Employees are not eligible for the deduction.
So if you receive W-2 wages and you want to use this deduction for that business, then you would not qualify for this deduction.
But if you aren’t an employee, and own a business or operate as an independent contractor, then you would be a qualified taxpayer.
So those are the individuals who qualify, and if that’s you, you’re probably wondering what you can deduct.
Here’s what you can deduct:
- mortgage interest
- property taxes
- homeowners insurance
- HOA expenses
But before we get to that, we need to discuss something far more important.
And that is one simple question…
How Much Can You Deduct?
How much of your mortgage interest, rent, and so on can you deduct?
Is it the full amount, a portion of the amount, or a flat fee?
Here’s the answer… it depends.
It depends on the square footage of your home that you are using for business purposes.
The IRS provides two basic requirements to determine this.
1. You must use an exclusive portion of the home for conducting business.
So you can’t deduct your bedroom as a home office expense, because you don’t exclusively use your bedroom to work on your business.
But you can deduct the portion of your home that you use exclusively for your business. Can you guess what that might be?
You’ve got it, a home office!
2. The home must be the principal’s place of business.
But wait… does this mean that if you have another business address then you can’t use this deduction?
Nope, not exactly.
The IRS’s website specifically states that a taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties.
We don’t know about you but for us, that sounds kind of vague.
They go on to say, “anyone who conducts business outside of their home but also uses their home to conduct business” may still qualify for a home deduction.
Now here’s our take.
From what we’ve researched, the IRS used to be strict on this rule but there was a court case where a doctor claimed the home-office deduction even though his home was not his principal place of business.
Long story short, that doctor won the court case and could claim the deduction for the work he was doing at home.
So get this – now they’re calling this the “Administrative Use Exception”.
Now we can’t legally advise you in this post in terms of what you should do in your unique situation, so be sure to contact your CPA, aka, LYFE Accounting, to file your business taxes and make sure you use this deduction correctly.
Anyway, there’s one BIG thing we still need to discuss.
How Do You Calculate Your Home Office Deduction?
Let’s go over the two ways you can do this.
According to the IRS, there are two methods to calculating your home office tax deduction – the simple method and the regular method.
The simple method is… very simple. So simple that it doesn’t save you much money.
Basically, with the simple method, you can deduct $5 per square foot of the business use of your home.
But here’s the kicker – you can only do this for up to 300 square feet.
This means that the maximum you can deduct under the simple method is $1,500.00 if you have a 300 square foot home office.
But what if you literally have a 1,000 or 2,000 square foot office that you use for your business?
What if you store all of your inventory in your basement? Or if you work in your garage like Steve Jobs? Or make products in your kitchen?
Or what if you have just a 300 square foot home office, but the portion of your home office expenses for the year exceed $1,500 by far?
If this is anything like you, then you should use the regular method to calculate your home office deduction.
The regular method takes the exact square footage of your home office and divides it by the total square footage of your home to find the percentage of your home that is used for business.
Then it applies that percentage to all of your home expenses to find the direct expenses that are applicable to your business.
Let’s walk through an example.
Let’s say you own a 3,000 square foot home.
And let’s say 1,000 square feet of your home is used for business.
Well, 1,000 divided by 3,000 square feet is 33%.
Then let’s add up your monthly expenses.
Let’s say your mortgage or rent is $2,000/month, plus $500 for utilities and other home expenses. So let’s call it $2,500/month.
Now since you’re filing your taxes for the whole year, you’ll multiply your monthly home expenses by 12.
So 12 times $2,500 equals $30,000 for the year.
You have $30,000 in-home expenses. And 33% of your home is used for your business.
So to find out what your home office deduction is, you’ll multiply your $30,000 of home expenses by the 33% of your home that’s used for your business.
Which would mean your home office deduction for the year would be $10,000.
$10,000 is a lot different than $1,500, isn’t it?
Today, we discussed the home office deduction in detail.
The home office deduction allows qualifying taxpayers to deduct certain home expenses from their tax returns.
Now remember, to qualify, you must own a business. And you must use a portion of your home exclusively for business. And you must rent or own your home.
Then we discussed what you can deduct. You can deduct almost all of your home expenses, including your mortgage interest, rent, utilities, and more.
And lastly, we discussed how to calculate your deduction. You can use the simplified approach, which is taking the square footage of your home office and multiplying it by $5.
But you can only deduct a maximum of $1,500 with this approach.
If you have a larger office or a higher amount of expenses for your home office, it may be more advantageous for you to use the regular method.
The regular method computes the exact percentage of your home used for business and applies that percentage to your home expenses to quantify your home office deduction.
And that is how you take the home office deduction for your business.
If you want to save on taxes in general, then don’t hesitate to contact us today and we’ll help you out.