So you’ve started your own business (hooray!) and want to know what deductions you are able to take. One of the most common questions relates to the home office deduction – Can I take it? Should I take it?
In order to take the home office deduction, 1) the space must be used exclusively for business purposes, and 2) it must be your principal place of business.
Let me clarify these:
To meet the exclusive use criteria, the office area can’t be used for other things. So you can’t have a home office that is also your guest room or kid’s playroom.
To meet the principal use criteria, the home office must be the main place that you conduct your business and where your business records are kept. You are allowed to do business in other places outside your home – but the space in your home must be where you do most of your business’ administrative work.
Now comes the question of “Should I take the deduction?” If you meet the requirements and the deduction amount is significant, you absolutely should. You might hear that it increases the chances of being audited. While that might be true, the increase isn’t significant and you shouldn’t let it scare you away from taking a legitimate deduction. Just be sure to keep good records (but that goes for everything you deduct – not just for the home office).
How to Calculate the Deduction
There are two methods for calculating the home office deduction – the simplified method and the regular method. Under either method, you have to calculate how many square feet you are using for your home office (remember the exclusive-use and principal-use criteria).
Below is a comparison of how the calculation is done using the two methods, and also how it differs for homeowners and home renters.
| Simplified Method | |
| Homeowner | Home Renter |
| $5 per square foot up to $1,500 (200 square feet) | $5 per square foot up to $1,500 (200 square feet) |
| Regular Method | |
| Homeowner | Home Renter |
| The following items are deductible based on the percentage of the home you use as an office: ● Mortgage interest* ● Property tax* ● Insurance ● Utilities ● Repairs ● Depreciation |
The following items are deductible based on the percentage of the home you use as an office: ● Rent (yep, really!) ● Insurance ● Utilities ● Repairs |
| * The portion of these expenses not allocated to the home office deduction are deductible on your personal return if you itemize deductions | |
Typically, the deduction will be more valuable for a home renter, since it allows them to deduct a portion of their rent – which is usually not deductible at all. They also don’t have to worry about the recapture of depreciation – which often forces a homeowner to “pay back” some of their tax savings when they sell their home.
Remember – there are probably some expenses related to your home office that are 100% business-related and thus not subject to the square footage %. If you buy a desk or computer or office supplies, those should be fully deducted as expenses.
