Working from home comes with many benefits, including the home office tax deduction. Money Girl explains what this new tax break is, how to find out if you're eligible, how to figure your deduction, and how much money you could save.
- Exclusive use – requires you to use a certain part of your home on a consistent basis for business. For instance, you might choose to work from a guest room, a detached garage, or any identifiable space.
If you live in a small place, like a studio apartment, you could have a desk that qualifies as your office. You don’t need walls to separate your office, but it should be a distinct area within your home. The only exception to this “exclusive use” rule is when you use part of your home for business storage purposes or as a daycare facility. In these two situations, you can deduct the entire spaces used, even if they are also used for personal purposes.
- Principal place of business – requires you to show that your home is the main place where you conduct business. However, it doesn’t have to be the only place you work or meet customers. For instance, you might also work at a coffee shop, a co-working space, or meet clients in their homes from time to time.
As I mentioned, your business could be part-time. If you have a full-time job at another company and work on your business from home in the evenings, you’re still qualified for the deduction, if you meet the two requirements.
How to Calculate the Home Office Tax Deduction
If you qualify for the home office deduction but have never taken it, you’re probably wondering how much you can claim. The deduction you receive depends on the type of calculation method you choose and the types of expenses you have.
The IRS allows you to choose between two methods and you can pick the one that gives you the largest tax break for any year:
1. Standard home office deduction
This method requires you to determine the percentage of your home that’s used for business. You divide the square footage of the area used for business by the square footage of your entire home.
For example, if your home office is 12 feet by 10 feet, that’s 120 square feet. If your entire home is 1,200 square feet, then diving 120 by 1,200 gives you a home office space that’s 10% of your home. That means 10% of the qualifying expenses of your home can be attributed to business use and the remaining 90% are personal use.
So, if your monthly power bill is $200 and 10% of your home qualifies for business use, you can consider $20 of the bill a business expense. To claim the standard deduction, use Form 8829, Expenses for Business Use of Your Home, to figure out the expenses you can deduct and then file it with Schedule C.
2. Simplified home office deduction
This method allows you to claim $5 per square foot of your office area, up to a maximum of 300 square feet. So, that caps your deduction at $1,500 (300 square feet x $5) per year.
If your office is larger, you’ll come out ahead using the standard method instead. The simplified method really is simple because you don’t have to do any record-keeping, just measure the space and include it on Schedule C.
If you own your home, you can also deduct home-related deductions (such as mortgage interest and real estate taxes) by itemizing them on Schedule A, Itemized Deductions.
The simplified method works best for small home offices, while the standard method is better when your office takes up a large portion of your home. If you’re not sure which is best, try both to find which one saves you the most in taxes.
But no matter which tax calculation method you choose, you can’t deduct more expenses than the amount of your home-based business’ gross income.
But no matter which tax calculation method you choose, you can’t deduct more expenses than the amount of your home-based business’ gross income. If your income from the business is less than your expenses, your deduction for certain home office expenses will be limited. When your qualified deductions are greater than your income, you can carry over the excess to the next tax year.