All you need to know about the home office tax deduction

With nearly 40 percent of the American workforce telecommuting, many people wonder about the potential benefit of home office tax deductions, but may lose out on a potentially substantial tax break. Like many other types of write offs, the home office tax deduction comes with multiple rules and best practices.

 Why is the home office deduction valuable?

Home office write-offs are complex, but beneficial as they are another way to deduct from your total taxable income. Many taxpayers are leery of the home office deduction due to confusion, but it is a potentially significant deduction – especially for self-employed individuals and small business owners who are looking for ways to reduce their overall tax burden.

Who qualifies for a home office write off?

The home office deduction is most commonly used among small business owners and freelancers, although telecommuting employees may qualify too. Really, the deduction can apply to anyone who uses part of a home exclusively and regularly for conducting a trade or business. (Occasional or incidental uses don’t count.)

You must use the home office as a main place of business, such as where you meet with clients or customers in the normal course of your business day. The exclusive-use work area must be an identifiable space and should not be combined with personal-use space (such as the family TV room). If you are an employee, there is an additional requirement that the business use must be for the convenience of your employer and you must not rent the space to your employer.

Special rules apply to daycare businesses, separate structures and space used for storage purposes.

And if you think you don’t qualify as a renter…think otherwise. Homeowners and renters are both eligible for a home office deduction – your home office just has to meet the above parameters to qualify.

How do you valculate the home office tax deduction?

The home office deduction can be calculated in two ways: the regular deduction method or safe harbor.

Regular Method

This method involves totaling the direct and indirect expenses of your home office for deduction purposes. Expenses can include:

• Mortgage interest payments
• Real estate tax
• Depreciation
• Rent
• Dwelling insurance
• Utilities
• Maintenance
• General repairs

Direct expenses incurred only for the business part of the home (for example, painting the home office) are deductible in full. However, indirect expenses like mortgage interest are based on the percentage of your home devoted to business use. Whether you work out of an entire room or just part of one, you’ll need to determine the percentage of your home used for business.

Safe Harbor

The safe harbor home deduction is a simplified way to claim a home office deduction. This option does not change the criteria for who may claim a home office deduction. If you use this simplified option, you can multiply the allowable square footage of your office by a rate of $5. The maximum footage allowed is 300 square feet and thus the maximum deduction is $1,500. This option will save you time because it simplifies how you figure and claim the deduction. It will also make it easier for you to keep records. Note that if you use this method, otherwise deductible expenses such as real estate taxes are fully deductible on Schedule A.

Where to find more resources on home office deductions

While the concepts involved in home office deductions can be difficult, resources are at your fingertips. View the Home Office Deduction and Home Office Safe Harbor articles for more information on this topic.