But the IRS imposes a lot of rules regarding what’s tax deductible and what’s not, and you may only be able to claim a percentage of your costs in many cases. It depends on whether an expense serves only your home office area or if a portion of it also serves the personal living areas of your home. Taking the time to understand and navigate the rules can pay off at tax time.
What Qualifies As a Home Office?
First, you must be sure that your home office is indeed a home office by IRS standards. The area can’t serve double duty as personal space when you’re not working there. The entire room would meet the qualifying rules if you use a spare bedroom solely and entirely for work. Only a portion of the room would qualify if you also sleep in that bedroom. You must separate the sleeping area. The area must also be your principal place of business and you must use it for business on a regular basis. You run your business from this location, even if you leave to perform certain jobs elsewhere.
Types of Deductible Home Office Expenses
There are two types of deductible home office expenses: direct and indirect expenses. You’ll probably find that the majority of your expenses are unrelated. Expenses such as lawn care or painting a room other than your office aren’t deductible because you don’t do business there.
Direct Home Office Expenses
Direct home office expenses relate to your actual workspace and are fully deductible. No other part of your home benefits from these expenditures. This would be the case if you paint that spare room you’re using for an office and you don’t use the space for any purpose other than work. You get a $1,000 deduction if you spend $1,000 on the paint job.
Indirect Home Office Expenses
Indirect home office expenses are more complicated. They relate to and are incurred by the whole house so they’re only partially deductible. A repair to your furnace would be an indirect expense. Your furnace heats your entire home, but only a percentage representative of the portion of your home that’s taken up by your office would be deductible if you had to pay to have it repaired or replaced. First, you must compare the size of your office to the size of your house using this formula: Office Square Feet ÷ Total SF of home = Percentage of Business Use Now multiply the percentage of your home that’s used for business purposes by the amount of the expense. Your deduction would be $150 for that $1,000 paint job if you had your entire house painted and your home office takes up 15% of your home’s total square footage. All indirect expenses must be multiplied by the percentage of business use, and they must be prorated for the time you actually used your home office if you began using the area for business purposes at some point during the tax year other than Jan. 1. Some indirect expenses are pretty common and are subject to this equation, along with some other factors that can affect the amount you can deduct. Real Estate Property Taxes Be careful not to deduct this one twice if you itemize your deductions on your personal tax return. If you deduct a portion of your property taxes as part of your home office deduction, you must reduce the real estate taxes listed on your Schedule A (listing your itemized deductions) by that amount. Mortgage Interest As with real estate property taxes, be sure not to deduct your mortgage interest twice if you itemize. Mortgage insurance premiums may also be deducted depending on your income. Rent Multiply your rent payments by the percentage of business use of your home. Homeowners or Renters Insurance Be sure that you only deduct the portion that covers the tax year for which you’re filing. Premiums are typically paid annually, so a portion of them might cover other years. Depreciation You can take a deduction for depreciation of the part of your home used for business if you own it rather than rent. Depreciation is an allowance for the wear and tear on your home. You can’t depreciate the value of the land. Depreciation is calculated by multiplying the adjusted basis of your home (its cost plus any permanent improvements) or the fair market value of your home when you began using it for business purposes, whichever is less, by the percentage of business use. Then you must apply another percentage supplied by the IRS. Taking a deduction for depreciation can have tax consequences when you sell your home later, so be sure to carefully consider whether a home office deduction for this expense is right for you.
How To Deduct Home Office Expenses
Expenditures for items that aren’t permanently attached to or benefit your work area as a whole are deducted on Schedule C if you’re a home business owner or independent contractor. This would be the case with costs like computers, a desk, or office supplies, as well as other expenses such as advertising or legal services. Claiming costs associated with your home office space itself requires completing and filing IRS Form 8829 with your tax return. The form provides meticulous and detailed line-by-line instructions to help you along with the calculations that are required. And here’s a bit of good news: You can skip all these issues and calculations if you decide to take advantage of the simplified option for claiming a home office deduction. Simply multiply the square footage of your home that’s dedicated to your office by $5 per square foot. That’s it. That’s your deduction. Unfortunately, your workspace can’t exceed 300 square feet if you use this option, so your total home office deduction (not including Schedule C expenses) is limited to $1,500 as of 2022.
