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Guide to the Home Office Deduction

by
Elvis Langha
on
6/15/2023
Guide to the Home Office Deduction

For any small business owner, the home office deduction could be one of the most valuable deductions they could take. Once all aspects of the deduction are tallied, the result might be tremendous tax savings by reducing taxable income.

There’s a lot to the deduction and what qualifies to be included. It’s essential to understand when the deduction may be taken and what aspects of the home’s expenses might be included to maximize a small business owner’s tax savings.

What Is the Home Office Deduction?

Suppose a portion of a home is used exclusively and regularly to conduct business. In that case, the small business may qualify to deduct certain expenses like mortgage interest, insurance, repairs, and utilities associated with the percentage of the home considered a home office. The work from home tax deduction may be taken regardless of whether the home is owned or rented.

To qualify as a home office, the office must be the principal place of the business and must-see regular and exclusive use for conducting business. A home office is an actual office space or a spare room, not the use of a laptop at the dining room table. Freestanding structures on the property, like a studio or garage, may also be used as a home office if they meet the qualification of exclusive and regular use.

If the taxpayer also does business outside the home, it must be shown that the home office is used substantially and regularly. For instance, if the business owner regularly meets with clients, customers, or patients inside the home office despite also using a location outside the home, that part of the home used as a home office may be deducted.

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Credit: Getty Images

How To Calculate the Home Office Deduction

The IRS offers regular and simplified options for calculating the home office taxes deduction, with the simplified option first becoming available for taxable years on or after January 1, 2013.

The regular method requires determining the actual expenses of the home office by calculating the office as a percentage of the entire home and then taking that percentage from each associated cost.

The simplified method allows a standard deduction of $5 per square foot of home office up to 300 square feet. No calculations need to be performed or records maintained.

While indeed easy, the simplified option does not allow for a depreciation deduction for the portion of the home used for business. It also does not allow for the recapture of depreciation upon the home's sale, whereas the regular method provides for both.

Neither option allows for a loss carryover into the current year for an amount in excess of gross income. Still, the regular method will allow for a loss carryover from the prior year’s use of the regular method if the gross income test is met in the current year.

Either method may be used in any chosen year.

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Credit: Getty Images

What Is Included in the Deduction

If the taxpayer uses the regular method to calculate their home office deduction, they may deduct an applicable percentage of:

  • Mortgage interest
  • Utilities
  • Insurance
  • Real estate taxes
  • General home repairs

For example, if the home office comprises 20% of the home, the small business owner could deduct 20% of the total expenses. If those expenses totaled $10,000 for the year, the taxpayer could deduct $2,000, whereas the under the simplified method, the deduction would max out at $1,500 (300 sq. ft x $5 sq. ft.).

It is essential to weigh the value of each calculation method, especially in areas of very high home values and the corresponding mortgages and real estate taxes.

The IRS Home Office Deduction has Tremendous Value

The home office deduction comes with considerable value when reducing a small business’s taxable income. Suppose a taxpayer uses a portion of their home or property for exclusive and regular business use. In that case, weighing the deduction method used and maximizing the amount deducted is imperative.

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Elvis Langha

Elvis Langha

LGE Advisory Services is based in Reisterstown, MD. We can assist you with your tax preparation, planning, bookkeeping, and accounting needs. Do you have IRS issues? No problem, we're here to help.

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