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.
Which Expenses are Deductible for a Home-Based Business?
If you run your own business from home, claiming the home office deduction is a smart way to make certain personal expenses partially deductible. Some of your everyday costs turn into business write-offs.
There are two types of expenses that you’ll need to track in order to claim the standard home office deduction: direct and indirect expenses.
- Direct expenses – are for your office only. Let’s say you start a side business, such as giving music lessons in your home or selling items on eBay. If you create an office in your spare bedroom and paint the room, install carpet, and install window treatments, these direct expenses are 100% deductible, no matter the size of the office.
- Indirect expenses – are for your entire home. You’d have these expenses even if you didn’t have a home office. For example, they might include mortgage interest payments, property taxes, rent, insurance, maintenance, cleaning, utilities, garbage disposal, and a security system. They’re partially deductible based on the size of your office as a percentage of your home.
But expenses that are completely unrelated to your home office—such as remodeling in other parts of your home or the addition of a pool—are never deductible. And you typically can’t deduct exterior expenses like yard work or gardening, even when you regularly see clients or vendors where you live.
The amount you can claim as a home office deduction depends on the type of calculation method you use and the types of expenses you have.
What Homeowners Should Know About Claiming the Home Office Tax Deduction
If you’re a homeowner, taking the home office deduction gets a little more complicated because only a portion of your mortgage payment is deductible. You can't deduct the principal portion, which is the amount you borrowed for the home.
Instead, you’re allowed to recover a portion of the cost each year through depreciation deductions, using formulas created by the IRS. You can claim mortgage interest, property taxes, home insurance, and depreciation, as indirect expenses.
Remember that even if you don’t run a business from home, you can deduct mortgage interest and property taxes as part of the mortgage interest tax deduction if you itemize on Schedule A. However, it’s likely that you’d come out ahead by claiming a portion of them for your business instead.
More Deductible Business Expenses
Business expenses that are unrelated to your home office are fully deductible no matter where you run your business or work when you’re self-employed. These might include business insurance, legal advice, a computer, and office supplies.
How you deduct a business expense and how much of it is tax-deductible depends on whether it benefits:
- Your entire home, such as power and water
- Your office only, such as carpeting or paint in that area
- Your business, such as a computer or software.
Claiming tax deductions on your home office and business can get complicated. Instead of running in the dark, reach out to a qualified tax accountant tax accountant who can help you make the most of your potential tax deductions each year, especially when you work from home. It’s well worth your time and money to seek advice and make sure your business will be successful.
You can learn more about the home office deduction rules in IRS Publication 587.
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