If you run a business from home, you may be able to claim a tax deduction that lowers your taxable income. However, it’s important to understand the IRS rules to ensure compliance and avoid potential audit risks.
There are two ways to claim this deduction: the actual expense method and the simplified method. Here’s what you need to know.
Who qualifies for the Home Office Deduction?
You may qualify for this deduction if you use part of your home regularly and exclusively as your principal place of business.
Even if your home is not your main place of business, you may still be eligible if:
- You regularly meet with clients, customers, or patients in your home office.
- You use part of your home exclusively for business-related storage, such as inventory or supplies.
- You have a separate structure on your property, like a garage or studio, used solely for business.
What expenses can you deduct?
The actual expense method
This method allows you to deduct a portion of your home-related expenses based on the percentage of your home used for business.
Eligible expenses include:
- Direct costs, such as painting or renovating your home office.
- A percentage of indirect costs, including mortgage interest, rent, property taxes, utilities, repairs, maintenance, and insurance.
- Business-related security system costs.
- Depreciation of your home office space.
While this method can provide a larger deduction, it requires careful recordkeeping and documentation.
The simplified method
For an easier approach, you can deduct $5 per square foot of home office space, up to a maximum of $1,500.
This method is best if:
- You prefer a simpler way to claim the deduction.
- Your home office is relatively small (since larger offices may benefit more from the actual expense method).
Can you switch between methods?
Yes. You can choose a different method each year based on what provides the best tax benefit. For example, you could use the actual expense method one year, the simplified method the next, and switch back again if it makes sense for your situation.
What happens if you sell your home?
If you sell your home for a profit after claiming home office deductions, there may be tax implications. The amount of depreciation you claimed may be subject to recapture, which means you could owe taxes on that portion of your gain. If this applies to you, it’s important to consult with a tax professional to understand the impact.
Additional considerations
- The total home office deduction is limited by the income generated from your business. However, unused deductions may be carried forward to future years.
- Employees do not qualify for the home office deduction. If you receive a W-2 from an employer, you cannot claim this deduction, even if you work from home.
Get professional guidance
Home office deductions can lead to significant tax savings, but they must be claimed correctly. If you’re unsure whether you qualify or which method to use, Padgett can help. Contact us today to discuss your options and maximize your deductions.