Home Office Deduction

The home office deduction is available to small business owners who regularly and exclusively use a portion of their home for business related activities. This deduction is taken if you file a Schedule C. In this article, we will go over the basics of the home office deduction.

The Basics

You can claim the home office deduction as both a homeowner and a renter. Your dwelling can be a single family home, apartment, or condo. You cannot claim the deduction for a hotel room or other temporary accommodation. The space you deduct must be used exclusively for conducting business. The space does not have to be the only place your conduct business, but it should be the principal place. If you are a work from home W-2 employee you cannot claim this deduction.

Calculating the Deduction

There are two ways to calculate the deduction, the simplified method and the actual expenses method. With the simplified method you find your deduction by multiplying the square footage by the prescribed rate. This would be a $5 a square foot up to 300 feet.

With the actual expenses method you deduct a portion of the overall expenses of your residence. This could include mortgage interest, taxes, maintenance and repairs, insurance, and utilities. There are some special considerations you need to take if you decide to use this method. First, you need to keep receipts for all deductible expenses. Second, you are required to depreciate your home value. This could potentially cause problems when you sell your home as it reduces your cost basis and may cause you to pay capital gains tax.

Taking the Home Office Deduction

If you feel taking the home office deduction is right for you, meet with your tax preparer to further discuss the consequences. Then they can help you determine if you should use the simplified or actual expense method.

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