If you use your home for business purposes, you may be able to deduct certain expenses, regardless of whether you own your home, rent an apartment or home, or rent a freestanding structure. You cannot take the deduction if it would cause your business to operate at a loss; you can only deduct up to your net income, but any remainder can be carried over to the following year.
- As a rule, the part of your home used to calculate the home office deduction must be used exclusively and regularly for business. In other words, it can’t just be a dining room table where you work at on occasion. You can ignore this rule if you use your home for storage of inventory/product samples or if you run a daycare facility from your home, but then you have a whole new set of requirements to meet.
- The office must be a place where you meet clients or customers or your principal place of business. What is a principal place of business? It’s the place where you earn most of your income or where you regularly conduct administrative or business management activities.
- W-2 employees may also qualify for the home office deduction, but you must use the space for the company’s convenience, and you can’t rent the area used for work to your employer. The deduction would be subject to the 2% of Adjusted Gross Income (AGI) threshold.
Traditional – This method begins with adding up the expenses incurred throughout the year. Any direct expenses associated with the office space (i.e., repairs directly to the office space) would be deducted in full, plus a proportional share of indirect expenses listed below:
C. Mortgage interest and property taxes
D. Homeowner's or renters insurance
E. Home maintenance and improvements (like a new roof)
- Simplified – Under this method, the deduction is simply based on the square footage of the home office at a standard rate prescribed by the IRS. It allows you to deduct up to $1,500 with little-to-no effort. Rather than calculating the proper percentage of whole home expenses, you take the rate of $5 per square foot, limited up to a maximum of 300 square feet.
If the portion of your home used for business is larger than 300 square feet, and/or the deduction would add up to more than $1,500, you’ll want to use the traditional method. Therefore, it’s important to calculate the deduction under both methods to determine the most advantageous deduction, and to review it on an annual basis.
As tax advisors, we know all about the intricacies of home office deductibility, and if you have any questions or concerns, please feel free to contact a member of our tax department.