Do you own a business and maintain a home office?
If you operate a business out of your home, you may be eligible to deduct home office expenses. While W-2 employees cannot claim the home office deduction anymore due to tax law changes, self-employed individuals and partners can potentially write off certain home office costs related to their business.
The tax specialists at Pennywise Tax Strategies have put together this guide on qualifying for the deduction and maximizing your eligible write-offs.
Qualifying for the Home Office Deduction/Expense
To qualify for the deduction, the space must be used regularly and exclusively for your business. This generally means solely for business purposes and on a consistent basis. Your home office must also meet one of three IRS tests:
- It's your principal place of business
- You use it to meet with customers/clients
- It's a separate structure used in connection with your business (like a detached garage or shed)
You cannot claim the deduction if you also use the space for personal purposes. Minor exceptions apply in some situations.
How to Claim this Deduction:
If you have determined that you qualify, you will need to consider how your business is taxed when determining how to claim this deduction and how much you can get for the deduction. If you are self-employed, you have two options in terms of how much of the method and how much of a deduction you can take. See the information below.
Options: Actual Expenses or Simplified Method
If you are self-employed (not an S-Corp), you have two options in terms of how much of a deduction to take:
- Actual expenses: You deduct business-use percentages of indirect costs like utilities, mortgage interest, etc., plus direct costs.
- Simplified method: Claim $5 per square foot used for business, up to 300 square feet ($1,500 max deduction).
The simplified method is easier but actual expenses usually result in a larger deduction. Consider future depreciation recapture on improvements when weighing your choice.
If you are an owner-employee of an S-Corporation, you can recognize this deduction through an accountable plan reimbursement by your business. This needs to occur during the tax year, so make sure you are regularly requesting reimbursement from your business!
Depreciation Rules and Carryover of Disallowed Losses
If you deduct actual expenses, you must calculate depreciation for any home office improvements, which lowers your basis in your home. This depreciation will be recaptured as taxable income when you later sell the home. Pennywise Tax Strategies can walk you through the computations.
If your annual home office deductions exceed your net business income for the year, the excess carries forward. These "disallowed losses" become deductible in future years when you have adequate business income.
Let the experts at Pennywise Tax Strategies help you maximize your home office deduction! Contact us today for a free consultation.