What is a Home Office Tax Deduction?
The home office tax deduction is basically a business use of a space in your home that you can write off on your taxes. Writing a portion of your home off on your taxes will help with offsetting your taxable income. The “home office” space can be an entire room, a partial room, or it can even be a little area of your kitchen if the space is dedicated use for business purposes. This deduction is only for business owners. The Trump Tax Reform removed this deduction for w-2 employees. The deduction will likely come back after 2025 but for now this is only valid for business owners. Now remember the key here is it must be dedicated office space for your business use.
|Home Office Deduction Calculation|
|Office (square feet)||100||=||10%|
|Home (finished square feet)||1,000|
|Monthly deduction||2300 x 10%||= 230/month|
Who can Claim this Deduction?
Sole proprietors, LLC members, multi-member LLCs, owners of partnerships, and partners in partnerships can claim this deduction pretty easily. If you own a corporation, whether it’s a C Corp or an S Corp, it’s a different process. As an owner of a corporation, you are considered an employee and as an employee, the corporation should technically be reimbursing you for these expenses.
So, if you’re a sole proprietor or a single member LLC, you calculate this amount by filling out Form 8829 and then claiming this deduction on your Schedule C. If you’re an owner of a multi-member LLC or a partnership the home office expense is going to be claimed as an unreimbursed partner expense.
How is the Home Office Deduction Calculated?
There are two methods of calculating your home office deduction. First is the Simplified Method which is simply $5 per square foot of your home office space. In our example below, you take the square footage of your home office space which is 100 square feet and multiply that by $5. For the Simplified Method you’ll have a $500 deduction. You are limited to a 300 square foot home office if you choose the Simplified Method, so keep that in mind. The Simplified Method is often less of a deduction than the Actual Expense Method.
To go over the Actual Expense Method, refer to the numbers in our example below. First, you will need to measure the square footage of your office. You will also need the finished square footage of your home. This figure is usually listed on websites like Zillow. If you’re renting, you should be able to find this information easily so that you don’t have to measure it yourself. Once you have those figures, you take the office square footage divided by the finished square footage of your home to calculate the percentage of your home that is dedicated office space. In our example this is 10%. The next thing you will need to do is gather all your bills that relate to your home expenses. So, let’s say you rent a place, that’s going to be your monthly rent, your utilities, your internet, whatever other bills you have to basically maintain the cost of living in that space. In this case we have $2,300 per month to live in this apartment. And to figure out the home office expense deduction we’re going to take $2,300 times 10% which we calculated. That gives us $230 per month that we can deduct on our dedicated home office space in this apartment.
If you own your home, the calculation is a little different because you pay a mortgage, and the mortgage is a combination of interest and principal but only the interest is deductible. So, for that calculation you would have mortgage interest, property taxes, utilities, internet, and depreciation. Calculating home depreciation is a discussion for another time. Once you have those figures, similar to how you handled the rental property, you add those up for however many months you use your office and multiply by the percentage of your home that your office occupies to determine your deduction. In our example, that percentage is 10%. These calculations are all done on IRS Form 8829, the Business Use of Home Form.
Home Office Calculation for a Home Addition
When you build an addition onto your home or you finish a basement in your home, you have increased the finished square footage of your home. You will need to take that into consideration when calculating your home office deduction. Because your total finished square foot has increased, you will have to include that added finished square footage in the denominator for your percentage calculation. This will likely lower your home office deduction expense. Now if you added a new addition to your home just for business use, then that would increase your percentage because both the numerator and denominator would increase in our calculation.
Claiming Unfinished Space in your Office Deduction
Some people use their garage as a “business use” space. For example, they use a portion of the garage for storage or for their Touro car rental. That portion of the garage can be used as a “home office” if you will but you have to include the entire square footage of the garage in your denominator or finished square footage. So, keep that in mind if you are planning to include a portion of your garage, or external shed on your property or a second building in your property in your “home office” square footage, just make sure you include the square footage of those buildings in your denominator as well.
We are here to help. If you need assistance in determining your home office deduction and preparing your taxes, reach out to us at www.nguyencpas.com or firstname.lastname@example.org and schedule a complimentary consultation with one of our advisors.