Home Office Deduction, Simplified!
I’m sure you’ve heard of the home office deduction. What you may not have heard of is that there is a way to claim the deduction that is much simpler to calculate and requires a lot less record keeping. I’ll get to that in a bit. First let’s determine if you can use this excellent deduction to keep more of your hard-earned money in your pocket.
The IRS has two basic requirements to claim the home office deduction. The area claimed for the home office deduction must be your primary place of business and have regular and exclusive use for your business. To put that into layman’s terms, a home office must be used as your main business office and be used primarily for business use, not personal. If you have a small business and have a dedicated space at home where you do your work you should consider taking this deduction.
The primary method of calculating the home office deduction is to take the square footage of the space used, divide it by the total square footage of your house and apply that percentage to the applicable expenses. Form 8829 lists some of the expenses that are allowable to be deducted. These are: mortgage interest, real estate taxes, insurance, rent, repairs & maintenance, utilities and depreciation (if you own the home).
Here is a basic example. If you have a dedicated home office space that is 10’X10’ (100’ square) and your home is 2,000’ square feet you can take a home office deduction of 5% (100/2000) for all the above expenses. This can add up quickly. To do this you would need to keep records for each of those expenses along with your method of allocation (square footage of your home office/total square footage of your home).
Now we get to the simpler method I mentioned earlier. The IRS allows a simplified option for the home office deduction of $5/square foot up to a maximum of 300 square feet. This option is elected by checking a box on your tax return and does not require a business owner to maintain all the records required to take the regular home office deduction. Using our same basic example as above the simplified deduction can give you a $500 deduction (100 square feet X $5) which is the equivalent of $10,000 worth of household expenses ($10,000 X 5% (area of total house that is used for the home office)). Much easier!
Facts and circumstances will determine what the best option is for you. Just know that this simplified home office deduction is out there, and you should talk to your tax professional to determine if this method is right for you.