The home office tax deduction is often overlooked by self employed (small business owners and independent contractors) individuals however, if you keep meticulous records, it can prove very beneficial at tax time. A qualifying home office can lead to larger overall driving deductions. In order to qualify, you must use your home office exclusively for business.
To qualify for this deduction, you must meet ALL of the threshold requirements:
- You must be in business (employees in someone else’s business can also qualify)
- You must use part of your home only for business (unless you keep inventory at home or run a daycare center)
- Use the home office for business on a regular basis.
You must also meet ONE of the following requirements:
- The home office is your principal place of business
- You regularly and exclusively use your home office for business activities. This could include managerial or administrative work
- You meet clients or customers at home
- A separate structure on your property only for business purposes is used
- Storing inventory or product samples at home
- You run a daycare center at home.
If your home office is also used for personal reasons, you won’t qualify for the deduction. The more space used only for business, the more the deduction will be worth.
There are two options for claiming the home office deduction:
The first option for calculating the deduction is the Regular Method. This method requires computing the business use of the home by dividing the expenses of operating the home between personal and business use.
Direct business expenses are fully deductible and the percentage of the home floor space used for business is assignable to indirect total expenses. Self-employed taxpayers file Form 1040, Schedule C , Profit or Loss From Business (Sole Proprietorship), and compute this deduction on Form 8829, Expenses for Business Use of Your Home.
The second option, the Simplified Method, reduces the paperwork and recordkeeping required. The simplified method has a prescribed rate of $5/square foot. There is a maximum allowable deduction up to 300 square feet. Self-employed individuals claim the home office deduction on Form 1040, Schedule C , Line 30; farmers claim it on Schedule F, Line 32 and eligible employees claim it on Schedule A, Line 21.
Regardless of the method used to compute the deduction, business expenses in excess of the gross income limitation are not deductible.
|Criteria||Regular Method||Simplified Method|
|Amount of Space||% of your home used for business||Max 300 square feet|
|Amount of Deduction||Actual costs associated with home office||$5/square foot|
|How to Deduct||Apportioned between Schedule A and business schedule (Sch. C or F)||Schedule A|
|Depreciation Deduction?||Applied to portion of home used for business purposes||No|
|Can Deduction Exceed Gross Income?||No||No|
|Excess of Gross Income||Yes||No|