Home Office Tax Deduction Guide

home office tax deduction guide

Estimated reading time: 5 minutes

There is nothing more convenient than running a small business from home. You can start your workday without dealing with the hustle and bustle of morning traffic, busy road construction, and other events that can cause you to arrive late. Plus, you can save time and money by making your breakfast and brewing a cup of coffee in the comfort of your home. Another convenience of running a small business from home deals with income taxes. There are many home office tax deductions that you should become familiar with.

The tax return preparation and filing process for a home-based business are relatively simple, so long as you maintain accurate records. However, specific business-related tax laws and deduction amounts are known to change, so we recommend you consult with a certified accountant to get reliable financial advice. In the meantime, this Balboa Capital blog post has some helpful information. Think of it as your home office tax deduction guide.

Qualification requirements.

The IRS has rules that help home-based business owners save money on their yearly taxes. If part of your home (e.g., studio, garage, spare bedroom, etc.) is used exclusively and regularly for business purposes, you can qualify for the home office tax deduction. For example, if you run a graphic design business from home and conduct business-related activities from your home office, you can write off a specific portion of rent/mortgage, real estate taxes, utilities, and other expenses.

In most cases, the space where you operate your home-based business cannot be used for anything other than business. For example, a spare room might not qualify for the home office deduction if it doubles as a family entertainment room or a children’s playroom. That said, you might be able to write off a portion of a shared space. Contact your accountant, as every business owner’s situation is unique.

Home office deduction options.

When calculating your home office tax deduction, choose from two options. The first option we will explain is the “simplified option,” which, as its name implies, is relatively simple. With the simplified option, you can deduct $5 per square foot for the room or area in your home used primarily for business purposes. The maximum amount of space that can be deducted is 300 square feet, which equals $1,500 per year. If you own a home or condominium, you can still write off your mortgage interest as an itemized deduction without allocating a percentage to your home office deduction.

The second option to consider is the “actual expense method,” which involves more record-keeping and number crunching. You need to add your total home office expenses with the actual expense method and measure them against your overall residence expenses. To give you a better idea of how this works, we came up with a sample scenario:

A computer repair business owner that runs her business from home paid $7,000 in mortgage interest and $4,000 in utility bills (indirect expenses), and $1,000 for home office improvements (direct expenses) last year. Her home office is 400 square feet, and the total square footage of her house is 3,000.

To calculate her home office deduction, the computer repair business owner needs to add up her total indirect expenses ($11,000) and multiply them by the 13.3% of office space in her home. To get this percentage, she divided the square footage of her business space (400) by the total square footage (3,000). She will then take this number ($1,463) and add $1,000 for the direct expenses to get a total deduction of $2,463.

Ordinary expenses eligible for deduction with the actual expense method include mortgage interest, insurance, upgrades, and repairs. The actual expense method is tailored for home businesses that operate in residences with significant square footage.

Travel expenses for a home-based business.

If you need to travel by automobile, plane, bus, or train for business purposes, you might be able to deduct certain travel expenses. Deductible expenses include but are not limited to plane fare, automobile mileage, parking fees, lodging, and meals.

Office equipment deductions.

Last on our list of deductions for home-based businesses is office equipment. After all, it would be impossible to run a business without office furniture, a computer, a printer, a telephone, and the like. In addition, most types of office equipment are deductible in the year they are purchased under the Section 179 tax deduction, so ask your accountant about this special IRS provision.

Accurate records are essential.

Running a home-based business frees up your time and gives you more control over your schedule. That means you will have time to stay on top of your income and expense records throughout the year. So keep your receipts in a folder, and use accounting software to record your financial information. Cloud-based accounting software is an excellent option because it reduces paperwork and lets you pull real-time reports and track inventory, sales, and expenses. Moreover, accounting software is more accurate than traditional spreadsheets because it has built-in formulas and categories.

If you are diligent with your record-keeping and do not fall behind, you will always have accurate books readily available. In addition, you will not have to gather everything during tax season and race against the clock to prepare your tax return. Hurrying through this process can result in errors on your tax return. In addition, documenting and recording your expenses will come in handy if the IRS audits your home-based business.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.