Do you ever work from home? The home office deduction can be great for lowering your tax liability!
However, it can also be scrutinized by the IRS, especially if you have a business location. How do you make sure you’re calculating and using the deduction correctly?
At CSI Accounting & Payroll, we’ve worked with small business taxes for over 50 years. That means we’ve spoken to thousands of small business owners about tax deductions, answering questions like these:
- Who can use the regular or simplified home office deductions?
- What can I deduct?
- How do I calculate my home office deduction?
Who Can Use Regular & Simplified Deductions
If you have a dedicated workspace in your home, there’s an option to “rent” the space back to yourself, but we don’t recommend this because there’s no tax deduction.
Otherwise, you can use the home office deduction. There are two kinds: regular and simplified. Let’s talk about the difference here.
Regular Home Office Deduction
Any entity can use the regular home office deduction as long as you have a dedicated workspace in your home.
You need to prove that this workspace is used exclusively for business and calculate the percentage of the home’s livable square footage that the workspace takes up. This cannot include non-livable space, such as a garage or yard.
This also needs to be an accountable plan. That means you need to track and save receipts of all of the deductible items, which we’ll talk about in the next section.
Simplified Home Office Deduction
There is also a simplified home office deduction that only sole proprietors with home workspaces can use. It’s ideal for them because it’s right on their tax return!
It’s much easier to work with because it’s a standard rate that hasn’t changed since 2018 when it was introduced. The deduction is $5 per square foot, capping at 300 square feet of workspace that’s eligible.
Which Things Are Deductible
If you use the simplified method, you only need to know the square footage of the space. However, with the regular method, you need to track all of your home office expenses. Those include:
- Homeowner charges (property taxes, homeowners insurance, mortgage interest)
- Renter charges (rent payments)
- Utilities (internet, gas, water, electric, garbage)
- Repairs and maintenance
Supplies, however, should be tracked separately. Things like your office chair, computer, and paper are 100% deductible because they’re not seen as part of the house.
The things listed above are deductible at a different rate. Finally, let’s get into that rate and the calculations!
How to Calculate the Home Office Deduction
Let’s use the information above to compare the calculations for the regular and simplified home office deductions.
Regular Home Office Deduction
For the regular deduction, you need to know the percentage of the home’s livable square footage (not including non-livable space like the garage or yard) that the workspace takes up.
Workspace % of Home = Workspace Square Footage / Home’s Livable Square Footage
You will use that percentage in the calculation to figure out how much of the homeowner or renter charges, utilities, repairs, and maintenance go toward that workspace. You will not include the cost of workspace supplies in this equation since they are fully deductible.
Total Home Office Expenses = Homeowner or Renter Charges + Utilities + Repairs + Maintenance
Now, we’re ready to put these pieces together.
Regular = Workspace % of Home * Total Home Office Expenses
Let’s use an example.
Your home is 2,000 square feet of livable space, and your home office is 100 square feet. That means it takes up 5 percent of your home (or 0.05 for the equation).
Your home’s homeowner or renter charges, utilities, repairs, and maintenance came out to $20,000. Plugging that into the equation, your regular home office deduction would be $1,000.
Simplified Home Office Deduction
Remember, the simplified home office deduction for sole proprietors is $5 per square foot, capping at 300 square feet. That means the calculation is… well, simple.
Simplified = 5 * Workspace Square Footage
If this calculation gives you a value higher than $1,500, you must use $1,500 since there’s a cap.
Let’s use examples.
First, let’s say your home office is 100 square feet. That means your simplified home office deduction is $500.
Next, let’s say your home office is 350 square feet. That’s more square footage than is allowed, and your calculation would come out to $1,750. However, since that amount is over $1,500, you would need to just use $1,500.
Maximize Your Deductions & Minimize Your Taxes!
Now that you know the differences between regular and simplified home office deductions, which things are deductible, and how to calculate the deductions, are you ready to check out monthly accounting services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about the different kinds of advice that a monthly accountant can provide by clicking the image below:
