The Home Office Deduction: How to Qualify and Calculate

When you first start a business, running it from home makes a lot of sense. Renting a workplace often isn’t practical when you’re trying to keep costs low. And it’s easier than ever to reach potential customers and stay in touch with colleagues and partners from the comfort of your own home.

Most business owners who have an office or workspace at home understand they can possibly deduct the expense from their taxes. But they might not completely understand the requirements and how to go about calculating the deduction.

Determining if you have a home office

The IRS has two clear requirements for deducting a home office expense from your taxes. The first rule states that the area of the home you work from must be exclusively used for business activity, on a regular basis. That means you can’t consider your living room or kitchen a home office for tax purposes. Even if you really do run your business from your couch or kitchen table, those areas of your home aren’t used solely for business activity. You can convert an extra room into a home office, such as your basement or a spare bedroom, but it needs to used only for business operations. Also, if you have a separate structure on your property devoted to business activity, like a barn, studio, or workshop, you’re likely in good shape.

The second requirement says that your home must be your principal place of business. This doesn’t necessarily mean you can’t claim a home office if you also have a dedicated workspace off your personal property. You just have to use your home office “substantially and regularly,” in the words of the IRS. This means the bulk of your business activity should be conducted from your home.  

What’s deductible?

You’ve determined that you really do have a home office that is used exclusively for your business, on a regular basis. Great! But what exactly can you claim on your taxes?

Costs directly associated with the home office can be fully deducted. For example, if you renovate your home office you can claim it as an asset and depreciate it over time.

You can also deduct a portion of your regular home expenses. Your mortgage/rent, utilities, property taxes, repairs, condo/neighborhood association fees, and depreciation can all be partially deducted. Even if the repair happened in a part of your home that is separate from your office, you can still partially deduct it.

Calculating your deduction

You can claim $5 per square foot for up to 300 square feet for your home office deduction. In order to calculate, start by determining the percentage of square footage of your home that is used for business activity. Then figure out the total annual cost of your home by adding up all your expenses from the previous year. Whatever percentage of your home is devoted to business use is the same percentage of your total annual home cost that can be deducted from your business taxes.

Let’s say you have a home that is 2,500 total square feet and you run your business from an office that is 250 square feet. The office space takes up 10 percent of your home, so you can deduct 10 percent of your total annual home costs from your business taxes. Be sure to keep in mind that your deduction cannot exceed $1,250 in this case because that would be more than $5 per square foot.

Keep your records

Most business owners don’t pay personal expenses, like mortgage payments or utilities bills, from their business bank account. Instead, they likely get paid a salary or take a draw from the business and use those funds to pay for living expenses. In this case, it’s very important to hold on to the proper records, like utility bills or paid invoices for repairs. In the event the IRS audits your tax filing, having the proper documentation will prove that your home office deduction is accurate.

Any home-based business owner should take advantage of home office deductions. Just remember to make sure you qualify, calculate your deductions correctly and to hold onto the proper documents.

BookKeeping Express (BKE) is an accounting and bookkeeping firm, serving clients nationwide. Visit our features page to learn how we can help your business.