Whether you work from home full time or just some of the time, you could be eligible for a home office tax deduction from the IRS.
Before you claim your deduction on your tax return, it’s essential to understand the guidelines that the IRS has put in place, so you avoid any troubles later.
Read on to learn more about this crucial deduction for freelancers and business owners that could help you save money at the end of the year.
Do You Use a Room in Your Home Exclusively as an Office?
To qualify for a home office tax deduction, you must have a dedicated area of your home that’s used exclusively and regularly for business-related work. The office should usually be a separate room or group of rooms in your home.
If you have a room that’s only partially used as an office, it can still qualify as long as you make that designated space clear. For example, a room partition that separates the space between office and casual activities should suffice.
The IRS is very clear about using a space in your home exclusively as an office. If you put furniture in the room and use that space as a full-time office only, you should have nothing to worry about. On the other hand, if you allow your kids to do their homework or play in that same room, it might not qualify as a home office.
You can make personal calls in your office or do other things, but generally, this space must be set aside solely for business-related purposes. As for the term “general use,” there are no specific definitions as to what regular use would mean. Generally, you must use one room for your business and keep it dedicated to work and nothing else.
Designating Your Home as a Principal Place of Business
Another essential factor that you must meet in order to qualify for a home office tax deduction is that your home office is the principal location of your business.
Alternatively, it must be a place that you regularly use to meet with clients and/or customers.
If the home office is located in a separate structure like a room over the garage or a shed, this guideline does not apply when it comes to meeting customers. As long as you can verify that this space is used exclusively for business activities, it should be eligible for the deduction.
In cases where your business has a home office, but you do a lot of your work elsewhere, your home still must be considered the principal location of your business. As long as you use this space to perform things like management and administrative duties, it should still pass muster.
Let’s say you work for another company, but you also use your home for your part-time business or side hustle. You should still qualify for the home office tax deduction. This works exceptionally well for those who conduct most of their work outside of the home. For example, if you are a traveling salespeople or trade professional.
How to Calculate a Home Office Tax Deduction
Once you know which part of your home you will use as a tax deduction, it’s time to calculate the information for your returns.
There are two ways to calculate your home office deduction. Either through the percentage of your home used for the business or through the simplified method based on square footage.
To use the business percentage deduction, you will need to measure the square footage of your home that’s dedicated as a home office. Then, you will need to determine what percentage that square footage is relativity to the total area of the house.
For example, let’s say your home office is 150 square feet, and your home is a total of 1,200 square feet. That means your business dedicated 12.5% of the total home size to an office space.
To calculate this number, simply take the office square footage and divide it by the home’s total square footage, and the result will be your percentage.
If most of the rooms in your home are generally the same size, you can simply divide the office by the total number of rooms to get a fast, easy percentage. You can also try to calculate your business office space using the simplified method.
This new method was adopted in 2013 and used a set rate that is multiplied by the allowable square footage you use in the home. The IRS determines what the maximum number of square feet that is allowable will be, and then they assign a dollar figure per square foot for that space.
As an example, if your home office is 200 square feet, your deduction will be $1,000, which is the current rate of $5 per square foot. Of course, this area of your home must be solely dedicated to business activity in order to claim the deduction.
Make Your Home Office Work for You
Once you’re aware of the requirements to get a home office tax deduction, it’s easy to add this information to your return. Let these guidelines work in your favor to help you save money at tax time.
Keep in mind that the IRS changes its rules and guidelines each year, so pay close attention and look out for any updates. As long as you’re using a space in your home for business purposes, this deduction should be part of your annual return.
Contact our team of tax attorneys today and reach out to us for a free case evaluation so we can help you with all your tax-related needs.