Working from home can be convenient and cost-effective, but did you know it might also help reduce your taxes? If you use part of your home for business purposes, you may qualify for a home office deduction. Let’s break it down in simple terms to help you figure out if this applies to you and how to make the most of it.
Who Can Claim a Home Office Deduction?
The IRS has clear rules about who can claim a home office deduction. To qualify, you must use a specific part of your home regularly and exclusively for your work. Here are some scenarios where you might qualify:
Principal Place of Business: If your home is where you do most of your work, you’re eligible.
Meeting Clients or Customers: You’re in the clear if you frequently meet clients, patients, or customers at your home.
Separate Structure for Work: Using a detached garage, studio, or similar space exclusively for business qualifies.
Important Note for Employees: If you work for someone else, your home office must be for your employer’s benefit, not just your convenience. You also can’t rent a part of your home to your employer and then claim it as a home office.
Other Business-Related Uses of Your Home
The deduction isn’t limited to traditional office work. Here are a couple of other ways you might qualify:
Storage Space: If you’re in retail or wholesale and use a part of your home to store inventory or samples, you can deduct that space.
Daycare Services: Those who run licensed daycare services from home can also qualify, even if the space isn’t exclusively used for daycare during non-business hours.
How Much Can You Deduct?
The deduction is limited by your business’s gross income. You’ll calculate your deduction by subtracting:
Non-Business Home Expenses: Things like mortgage interest and property taxes that you could deduct even without a home office.
Business Expenses Unrelated to Your Home: Think office supplies or advertising costs.
Home Office-Related Expenses: Utilities, insurance, or maintenance for the portion of your home used for work.
Any leftover amount can be carried forward to the next year, but the same limits apply.
Two Ways to Claim Your Deduction
You have options when it comes to calculating your home office deduction:
1. Regular Method:
This method involves tracking actual expenses and dividing them based on the percentage of your home used for business. For example, if your office takes up 10% of your home, you can deduct 10% of your utility bills.
2. Simplified Method:
Don’t want to deal with all the math? The simplified method lets you deduct $5 per square foot of office space, up to 300 square feet. That means a maximum deduction of $1,500.
While the simplified method saves time, it may not yield the highest deduction. Choose the one that works best for you.
Reporting Your Deduction
To claim your deduction, you’ll need the right forms:
If you’re self-employed, use Form 8829 with your tax return Schedule C.
Employees or partners should consult IRS Publication 587 for guidance.
Keep in mind that the rules for employees have changed. Miscellaneous itemized deductions, including the home office deduction, are temporarily suspended for most employees through 2025.
Tips to Keep in Mind
Keep Good Records: Save receipts, utility bills, and any other documents related to your home office.
Measure Your Space Accurately: You’ll need the square footage to calculate your deduction.
Follow IRS Rules: Ensure you meet all the requirements to avoid issues if you’re audited.
Need Help?
Navigating tax deductions can feel overwhelming, but you don’t have to do it alone. Our CPA firm specializes in helping small businesses and self-employed professionals maximize their tax savings. Contact us today for personalized advice and let us handle the details so you can focus on growing your business!