Home Office Deductions

Do you ever work from home?

Do you have a separate space at home designated for regular & exclusive business use?

Now just to be clear….. We’re not talking about the kitchen table or your guest bedroom!

We’re talking about a separately defined space in your home where you only work on your business.   If this applies to your business operations from home...  then you may be entitled to deduct the expenses for the percentage of square footage your home office occupies.

I was surprised to learn (and you may be too) just how much you can save…. The IRS says this tax deduction brings self-employed persons who qualify, an average tax savings of $3,000 each year!

Okay, so how do we get this deduction?  You can claim the deduction one of two ways outlined below....

Regular Method

You can deduct a percent of your actual expenses based on the portion of your home devoted to regular & exclusive business use.  Included in the deductible home office expenses could be:

• Combined Totals of Mortgage Interest & Property Taxes
• OR rent
• Insurance (homeowners, renters, earthquake, fire, flood, etc)
• Utilities
• Pest Control
• Repairs  

If you’re meeting with clients at your home you may even be able to deduct expenses paid to the gardener and housekeeper.

If you own your home, you will need to depreciate the value of the home (after remembering to prorate for the value of the land).

So, that’s all great…. And this really offers the potential of some great deductions but it can be a lot of work determining those values.  Especially since we’re talking about your personal residence expenses and those deductions are unlikely to be running through your books (we hope!).  

So, as promised, the “hack” to simpler bookkeeping and better home office deductions….

The Optional Method

A couple of years ago (in 2012 actually) the IRS offered an alternative method to calculating the home office deduction. This method does not require tracking your expenses throughout the year, nor does it require claiming depreciation (or recapturing it!). With the alternate method you simply take the square footage of office space used regularly & exclusively for business and multiple it by $5.  Pretty simple right?!

Here’s an example of the simplified method… If you have a 250 square foot office used regularly and exclusively for your business, that could be a $1,250 deduction on your tax return!

Using the actual method, that 250 square foot office in a 1,000 square foot home would entitle you to deduct a quarter (25%) of your total home expenses.  And remember, the IRS says the average home office deduction is $3,000.

But since we're discussing the home office deductions pretty in depth.... Here are a couple of words to the wise…

First, don’t try and cheat by deducting your kitchen table.  If that’s where you work, great!  But don’t try and deduct it as a home office used regularly and exclusively for business… The IRS will find out and that audit adjustment won’t be pretty!

Also, important to note..... If you own your home, your mortgage interest and property taxes are usually already deductible as an itemized deduction. If you claim the home office deduction you will need to prorate those expenses between the Home Office Deduction form (8829) and your Itemized Deductions (Schedule A).  Most Software will perform this calculation for you, but be careful not to double count them.  While these expenses are already deductible, there likely still will be tax savings from putting the mortgage interest and property taxes on the Home Office Deduction form 8829.  Because the home office deduction reduces your self-employment income, it likely will SAVE you self-employment taxes.

But, it’s equally important to note that you cannot deduct home office expenses in excess of your net self-employment income.  So if you're showing a loss, a home office deduction is not really going to benefit you this year. But…. If you take the actual expense method, you can carryover the unused deductions from year-to-year, as long as you present it correctly.  Meanwhile, while the simplified method is simpler.  You cannot carry over the deduction from year to year.

Okay, so now that we've discussed all things home office deduction related you are ready to start saving money on your taxes! 

If you're feeling inspired about finding other tax saving strategies you can take advantage of, we encourage you to download a free copy of our 6 Tax Saving Strategies here.

Disclaimer This article presents general information and is not intended to be tax or legal advice.  Refer to IRS publications and discuss possible tax deductions with your tax preparer.