If a portion of your home is used for conducting business, you may qualify for a home office deduction. You can choose from a couple of different methods for calculating the deduction. You might also need to know your total deduction for IRS ID verification purposes. We’re going to show you how to get it all with these home office deduction tips for Airbnb hosts.
Home Office Deduction: The Basics
If you work from home and have a home office, you can probably claim the home office deduction. This overview explains everything you need to know about this powerful write-off.
What is the Home Office Deduction?
Taxpayers with home offices can claim a special deduction on their tax return to compensate them for business use of their home. These deductions provide tax relief to people who use part of their home to conduct business on a regular basis.
The deduction credits you for a portion of the expenses you pay to run and maintain your home, such as utilities, rent, and other costs. Your office’s size in relation to the size of your home determines the allocation rate for your home office deduction.
Who Can Claim the Home Office Deduction?
If you have an area of your home set aside as your principal place of business, you can qualify for the home office deduction. If you want to claim this lucrative deduction, you must meet two primary criteria.
First, you must use your office regularly and exclusively for business. For example, you can qualify if your office is in a dedicated room, shed, or other area of the home dedicated to business use. You cannot claim the home office deduction if you typically work at your kitchen table or in your living room.
Second, your must use your home office as your principal place of business. If you have an office in town, but you sometimes work at home, you don’t qualify for this deduction,You can most likely claim the home office deduction if you satisfy these two qualifications. Talk to a tax advisor for more information.
Home Office Expense Methods
If you would like to claim home office expense deductions on your tax return, you can choose from two different methods.
Simplified Deduction
The simplified method uses a set rate to determine your deduction based on the size of your office by square footage. Your deduction totals the square footage of your office times the specified IRS rate. Currently, you can write off $5 per square foot with a maximum allowable deduction of $1,500. You cannot exceed a $1,500 deduction with this method, even if your office is larger than 300 square-feet.
Itemized Deduction
The itemized method allows taxpayers to claim a portion of their housing expenses as a deduction. You can calculate the deduction by first determining the portion of your home’s floor space dedicated to your home office.
For example, a 150 square-foot office in a 1,500 square-foot home allows a 10% deduction. So, if you spent $10,000 on rent, utilities, and other housing expenses, you can deduct $1,000 in this scenario.
The itemized home office deduction can provide larger discounts than the simplified method, but it also requires more extensive record keeping. It’s more difficult to calculate as well, so many people opt for the simple way out with the itemized deduction.
Generally, we advise you to choose whichever method gives you the largest deduction. However, you should consult with a tax advisor for advice that’s best tailored to your unique circumstance.
Minimizing Audit Risk
While using the home office deduction on your annual tax return is a great way to reduce your tax liability, abusing the home office discount is a good way to get audited. Here are some tips that should help you minimize your audit risk regarding the home office deduction.
The most important thing is that you keep receipts of all of your home office expenses that you intend to itemize. Everything from equipment purchases and repair bills to electric and utility bills should be maintained. If you’re ever audited by the IRS, all that’s required of you is to provide these receipts.
Make sure you calculate your home office deduction correctly. Any errors could prompt an IRS audit, and you’ll have to provide evidence to support your claims. Recently, the tax code changed to make it easier for individuals to claim home office deductions without triggering an audit, but you still have to be careful.
Other Home Office Scenarios
The home office deduction gets tricky sometimes. These tips will help you navigate a couple of unique home office situations.
Multiple Offices
If you have multiple home offices that you’ve worked in for the year, you may be able to claim expenses from both of these offices. You should calculate and allocate expenses for each office individually, so your total expense will depend on both your total costs and the amount of time you worked at each office. Please note, you cannot deduct the same expense for both offices.
This might sound like an odd situation, but it typically applies to taxpayers who’ve moved during the course of the tax year. If you fall into this category, you’ll have to track and deduct expenses for each office. If you itemize your deduction, you’ll have to calculate your expense allocation for each location, and then apply that to the expenses accrued at the given office.
Dual-use Properties
Do you keep an office in a property that you also rent out? If so, this must be taken into account when it comes time to file your taxes. The home office deduction can change depending on if you’re an owner or a renter. A renter is able to deduct a portion of their monthly rent when filing their tax return. This percentage is equal to the square footage percentage of the area that’s being used for business purposes.
Closing Thoughts
The home office deduction can be a valuable deduction for independent contractors and Airbnb hosts. Since it’s become more common in recent years, It’s losing its reputation as a potential audit trigger as well. If you have a case for claiming this deduction, it’s worth taking it.
Talk to the pros at Shared Economy Tax today to maximize your tax savings with the home office deduction and other sophisticated tax strategies. Get started today with a one-on-one strategy session with one of our talented tax pros here.
