Understanding the home office tax deduction

home office tax deduction
home office tax deduction

Right since the beginning of the Covid-19 pandemic, many people started working from home. 2020 has been the year of work from home for many of us. So, if you are using your house space for your business? Well, then I have some good news for you. Yes, this is financially good news for you to save some more money. The home office tax deduction permits you to deduct expenses for the business use of your home. The home office tax deduction, if you are qualified, will deduct some tax returns also. It is available for renters, homeowners and valid for all types of homes. 

Amidst the pandemic, where we all are working remotely from home, It is an excellent opportunity for small businesses and entrepreneurs to save a good amount of money. However, before applying for home office deduction, you must meet the IRS requirements. So, if you are using a part of your house exclusively for business, apply for it now. The IRS allows you to write off associated rent, utilities, real estate taxes, repairs, maintenance, and other related expenses.

If you want to save on your taxes, check our guide How to save up to $2,000 on Taxes.

What is a Home office deduction?

Home office deduction allows you to reduce your taxable income. So, when you run through your house space, you can claim several deductions to taxable income. However, as everyone is working from home now, only those who are self-employed are eligible for home office deduction. 

According to the IRS, the deduction only applies to business who use their house space for it. So if you are a home-based business, you must not think twice and apply for it.

Started on January 1st, 2013, the Internal Revenue Service (IRS) authorized the home office deduction. It is a new simplified method, beneficial for all self-employed businesses at home.

How to qualify for a home office tax deduction?

As mentioned above, there are many IRS guidelines you have to follow before you get qualified. It is essential to fulfilling IRS requirements for home office tax deduction. Remember, it does not matter if you are the homeowners and renters. What type of home you live in either: a house, apartment, condo, or even a shack in the woods. All you have to do is use the space exclusively and regularly to qualify.

The simplest way to determine if you qualify for the deduction is to deduct $5 per square foot (set by IRS), up to 300 square feet, of office area, which amounts to a maximum deduction of $1,500.

Read all you need to know about Understanding Federal Income Taxes.

Regular and Exclusive use

If you want to qualify for a tax deduction, the space at your home should be exclusively used for managing a business. You cannot claim for it if you are utilizing the home space occasionally. Regular use mandatory to get qualified. 

For example – If you are using the same space for your guest room, and office you are ineligible.  

However, there two exceptions under IRS rules, First, if you are running a daycare service for children, handicapped, elderly and, you have a license under the state law, you can claim for deduction. The second one is if you use the space for storage and inventory. That only applies when you exclusively do business from home. 

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The principal place for business

Your home should be the principal place of your business. However, this does not restrict you meet your clients and customers at home only. All the administrative work like billing, setting appointments, maintaining records, or anything that comes under management activities is valid. This rule does not restrict you to do only inside your house. 

How to determine your home office tax deduction?

Well, the IRS has two options for you to calculate what deduction is worth. There are two methods regular method or the simplified option. 

Simplified option

The simplified option, as the name suggests, is simple. The first is – All you need to do is calculate the total area of your office space, up to a maximum of 300 square feet, and multiply that by $5. 

Now, subtract the business expenses not related to your home expense from gross income related to the home’s business use. If the expenses surpass the total income produced by the business use of the property, you can’t take a deduction. 

So, if the gross number is higher, compare that to the number you got in the first step by multiplying your permissible business area by $5. Whichever of the two numbers is smaller is the amount you can claim for the home office tax deduction applying the simplified method. 

What method you use depends upon how much of your space is utilized by the business. The gross income and buisness expenses also play a vital role here. Keeping a record or proof of every income you filed is essential. 

This new simplified method can appreciably reduce the weight of recordkeeping. And allowing a qualified taxpayer to multiply a prescribed rate by using the allowable foursquare footage of the workplace instead of determining actual expense. 

Regular method

In the regular method, you need to calculate your deduction based on the actual expenses associated with your home office. These expenses include mortgage interest, insurance, utilities, repairs, and depreciation.

To use this method, calculate the total eligible expenses for your house and then determine the part of those utilized for the business. The deduction for home office in a regular method is based on the percentage of your home dedicated to business use.

Conclusion

So, if you are running your business from home, a home office tax deduction is an excellent way to save money. It can potentially help you save a lot on your taxes. Doing your research well before applying is a basic step we all must take. You can consult a tax accountant to be more sure about a decision. It is always a good idea to take expert advice. 

Claiming for a home office tax deduction is the best option when you are planning to minimize your enterprise’s tax liability. Remember, claiming the tax deduction for this year does not make you eligible for the next one. Every year you have to suffice the rules of regular and exclusive and principal place for business to get qualified.

I hope you get qualified for home office tax deduction. Keep making healthy financial choices with National Resource Connect. Happy financing!

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