Accounting and Tax Tips Blog

home office deduction

As a business owner, tax deductions are your best friend. They help lower your taxable income, which helps you lower your tax bill. Qualified business expenses can actually be a huge benefit come tax time. Office supplies,  marketing costs, and even office rent can qualify as a tax deduction. One commonly used write off for independent contractors is the home office deduction. Here is what you need to know about claiming the home office tax deduction. 

Home Office Deduction On Taxes

The home office deduction allows you to claim a portion of your rent or mortgage as a qualified expense. In order to claim the home office deduction, you must use your office exclusively for work-related activities. It must also be a designated space, so a space on your kitchen table does not qualify.

There are several ways you can calculate the deduction, the regular way and simplified. If you elect to use the regular way, you must calculate the actual expenses of your home office. This includes utilities, insurance, repairs, and depreciation. To determine the actual expense of your home office, you must calculate the percentage of your home used for business purposes. The most common method to do this is based on square footage.  

Simplified Home Office Deduction 2019

Beginning in 2013, the IRS released a simplified method of calculating the home office deduction. Under the simplified version, you can deduct $5 per square foot, up to 300 square feet, or $1,500.

The simplified method makes calculating your home office easier. However, if you use the simplified method, you can’t claim depreciation deductions or recapture depreciation upon the sale of your home. Also, the deduction can not exceed the gross annual income produced from the business, and any excess of gross income limitation may not be carried over. 

How to Calculate Your Home Office Deduction

To calculate the amount of your deduction, you must first decide which method you want to use. If you choose the regular method, you must determine the amount of each of your expenses and what percentage of your home that was used for business. These expenses can include:

Insurance

You can deduct a portion of your insurance costs as a business expense. 

Mortgage Interest

Mortgage interest is a tax deduction, but you can also include it as a business expense. 

Rent

If you use 10% of your home for business, you can deduct 10% of your rent as a home office expense.

Repairs

Did you do any remodeling in your home office? For example, if you painted the walls in your office, you can claim it as a business expense. 

Utilities

You can deduct a portion of your utility bill based on the percentage of your home used for business. 

Depreciation

If you own your home, you may be able to deduct depreciation expenses based on the purchase price. Check with a professional to confirm this calculation.

home office deduction

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Determining Your Home Office Business Expenses

Once you have calculated your expenses, divide that by the home-to-office percentage. For example, if total expenses equal $2,000 and you use 10% of your home as an office, you can deduct $200. 

The key is to calculate the business percentage accurately. To find the correct total, measure the space used for business and divide it by the total square footage of your home.

For example, 100 square feet for business in a 1,000-square-foot home equals a 10% home office rate.

If you choose to use the simplified method, simply calculate the square footage of your office. As mentioned above, you can claim $5 per square foot, up to 300 square feet. This reduces a lot of the calculations you have to do with the regular method. 

Regardless of which method you use, the amount of your deduction cannot be greater than your gross income earned from the business. Once you have selected a method and used to prepare and file your taxes, you cannot change the method. You can use a different method for subsequent tax years. Which method you choose will depend on your tax situation. You should talk to your tax advisor about which method is best for you. 

Home Office Deduction Worksheet

Trying to calculate your home office deduction? Calculating your home office deduction doesn’t have to be rocket science. If you need help calculating your home office deduction, we offer a free worksheet from the IRS that can help you calculate your totals. First, you need to gather a list of your home office expenses. Then, click here to download this free PDF.  

Help With Your Home Office Deduction

One of the best things you can do for your business is to hire a tax advisor. A tax advisor already knows the tax code and the laws that apply to your business, so you don’t have to. This can save you a lot of time, and as you probably know, your time is valuable to your business. In addition, working with a tax advisor can actually save you money. We’ll help you find the best calculation method for your business.  You can also rest assured that your taxes will be prepared correctly and filed on time 

If you’re not sure which home office deduction is best for you, get help from the experts. Get started with a free one-on-one strategy session with a Shared Economy Tax expert today, or sign up for our newsletter for more helpful 1099 tax tips.