When you run a business out of your home, whether it’s full-time, part-time, or even as a convenience to your employer, you know that every deduction counts when it comes time to prepare your return. This is why the IRS has recently reminded small business owners of a little-claimed deduction known as the Home Office Deduction.
The Home Office Deduction can be claimed on any space in your home that you use for business purposes exclusively. The federal government makes this deduction available to small business owners to help offset their other home business costs – generally, it is intended for use only by independent contractors but there are situations in which W2 workers may also claim this deduction.
Which Small Business Owners Can Claim the Home Office Deduction?
You must meet three requirements in order to claim the deduction
- You must be in business or employed in by another business (working remotely);
- The part of your home that is used as an office is only used as workspace;
- And your home office must be regularly used.
Once you meet all three of the previous criteria, you must then meet at least one of the following requirements as well:
- You run a daycare or child care center out of your home.
- You store your product inventory at your home.
- You meet your clients or customers at your home.
- Your property has a separate structure that is used only for business purposes.
- Your primary place of business is your home office.
- You use your home office on a regular basis and only for business activities, including administrative or managerial tasks.
Once you have met all of the requirements to claim the deduction, the deduction may be claimed or reported one of two ways: the regular method or the simplified method.
The Regular or Traditional Method for the Home Office Deduction
The regular method for calculating what your home office deduction should be involves the direct and indirect expenses of your home office. A direct expense here refers to expenses that affect just the home office. Indirect expenses are expenses that affect the entire property, not just your workspace.
For indirect expenses, you need to consider what percentage of your home is taken up by your home office. Suppose that your workspace takes up roughly 15% of your home – this would mean that you can deduct 15% of your utilities, insurance, rent, and other indirect expenses. This is combined with your direct expenses and is calculated on Form 8829.
The Simplified Method for the Home Office Deduction
The simplified method is just as it sounds – it’s much simpler to calculate than the regular method. There is no need to bother with direct and indirect expenses, all you need to do is measure the square footage of your home office space. Take the square footage and multiply it by $5 – this will be your deduction.
The simplified deduction can only be taken if your home office is 300 square feet or smaller. Any workspace that is larger must be claimed using the regular or traditional method. When using the simplified method for calculating, if you are self-employed you can claim it on Form 1040, Schedule C; and if you are an eligible employee you can claim it on Form 1040, Schedule A.
Please note that whatever method you choose will need documentation to back up your claim, and your deduction can’t exceed the gross income use of your home.
Contact Executive Accounting Services
If you’d like to know more about calculating your small business taxes and what you can do to save yourself more money, contact Executive Accounting Services today by calling 919-859-8600 or filling out our form.