All You Need To Know About Home Office Tax Deductions

Whether you are a business owner, a self-employed individual, or an employee, you may be entitled to deduct certain expenses for the part of your home you used for business purposes. Here I will teach you step-by-step how you can deduct business expenses for your home office.

What is considered as a “home”:

For tax return purposes, the term “home” includes a house, apartment, condominium, mobile home, boat, or similar property which provides basic living accommodations. It also includes structures on the property, such as an unattached garage, studio, barn, or greenhouse. So the definition of “home” for tax deduction is not limited to where you live but also includes the plans that are unattached to your primary residence. To qualify as a main residence, part of the home must be used regularly and exclusively.

Once these two rules are met, now you are ready to find out how to do the home office tax deductions. You have 2 options: the simplified method or actual method to calculate your deductions:

Simplified method:

In most scenarios, you will figure your deduction by multiplying $5, the prescribed rate, by the area of the home used for a qualified business purpose. The area used to determine the deduction is limited to 300 square feet. In other words, to use the simplified method, the maximum area you can deduct is 300 square feet and the deduction amount is $5 per square foot.

The simplified method is a quick and easy way to find out the tax deduction by using $5 per square foot (up to 300 sq ft) for deduction, but keep in mind you cannot deduct more than your gross income from the business use of your home minus your business expenses. For example, if you earned $30K while using your home for business, and your expenses for your home office and business are $28K, then you cannot deduct more than $2K.

Actual method:

You can also use the actual method for business use of home deduction. The first step is for you to figure out the percentage of your home used for business and the limit on the deduction. After finding out the size of your office at home, you simply find out the percentage of the office out of the entire home. For example, if your office is 400 sq ft and your house is 1,600 sq ft, your home office deduction is 25%.

After finding out the percentage of home office use out of the entire house, you also need to know what are the expenses that can be deducted against the house. Deductible expenses for business use of home include the business portion of real estate taxes, deductible mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance and repairs. If expenses such as painting the house or lawn care are not used for business, then they should not be deducted for business.

Compare to the simplified method, the actual method is based on the exact amount that has been spent for your home office.

Carryover of unallowed expenses

What if your home office deductions are greater than the current year’s limit? The excess amount may be carried over to the next year. They are subject to the deduction limit for that year, whether or not the taxpayer lives in the same home during that year.

Takeaways:

Now you know the two different methods to do home office tax deductions: the simplified method and actual method. The next step is to find out which method is more suitable for you. You can do a calculation of both methods and find out which one gives you the bigger return. I hope this article answered some of the questions you might have related to home office deductions. As usual, feel free to let us know if you have any more questions!