Tax planning can be challenging and finding ways to reduce your taxes can by frustrating. Here are 3 common questions I am asked when it comes to the Home Office Deduction when filing tax returns.
Can I take a Home Office Deduction to reduce the tax I owe?
If you answer YES to any of these questions you can take the deduction.
- Do you use your home office as your central place of business or do you meet clients or customers there?
- Do you use your home office on a regular basis? The key is that you use the office on a constant basis, not necessarily daily.
- Do you use your home office just for work? This means you can’t use it for any other purpose, such as; there’s a bed in the room and over-night guests use the room or you use the room during the day but the family uses the room at night.
What can I deduct using the home office deduction during tax preparation?
Once you have determined if your business space in your home qualifies, you are able to take deductions for expenses such as:
- Operating expenses
- Mortgage interest
- Real estate taxes
- Rent (with the exception of rent paid by the employer for the area in question)
- Casualty and theft losses
- Utility costs
- Cleaning and other services
- Homeowner’s insurance
- Security system costs
- Repair costs (labor and supplies)
How do I calculate the home office deduction?
- Simplified Option – multiply the square footage of the home office, not to exceed 300 square feet by $5, up to a $1,500 deduction.
- Actual Expense Method –
- The first step is to determine what percentage of your home your office takes up, in terms of square footage. If your home is 1,000 square feet, and your office is 10 feet by 10 feet, your office is 100 square feet and thus encompasses 10% of your home. Or, if all the rooms in your house are roughly the same size, you can divide the number of rooms you use for business by the total number of rooms in the home.
- Next, multiply the percentage by your home expenses. For example, electricity $2,950 (whole house for a year) multiplied by 15% (home office percentage) equals $442 for a deduction.
- Fill out Form 8829 to report the deductions.
The home office deduction can save you a lot of money on your taxes. If you are a small business owner now is a great time to start gathering your receipts, utility statements and mortgage statements. Be smart and seek a professional to help you navigate through filing your tax return.