You may be eligible to deduct the portion of your home expenses related to your business through the home office deduction. In order to take advantage of this deduction, there are a few criteria that the space must meet.
Home Office Criteria
Your home office needs to be used exclusively for business. This means your couch, exercise room, and kitchen table don't count.
Your home office needs to be a fully dedicated work space.
Your home office needs to be used regularly for management and administrative functions.
If you qualify to take the home office deduction, there are two options for claiming it: Simplified or Regular.
Simplified Square Footage Method
This is the easiest method for calculating your home office deduction. The IRS dictates that you can deduct $5 per sq ft of your home that is used exclusively for business purposes up to $1,500. For example, if your office is 200 sq ft, then your home office deduction under this method would be $1,000.
If you use the simplified method, you aren’t able to deduct other home office related expenses. If you anticipate having more than $1,500 in home office deductions based on your expenses, then you may want to use the Regular Method.
This method is typically the most advantageous if you have a lot of home office related expenses. Expenses are broken down into two categories: direct & indirect.
Direct expenses are expenses that are directly connected to your home office and includes expenses like office furniture, renovations to office, phone line for business, etc.
Indirect expenses are associated with the home in which your office is located. This includes the cost of rent, mortgage, utilities, etc. The IRS states that you can claim the portion of indirect expenses that correlates to the size of your home office. To calculate this percentage, divide the total square footage of your home by the square footage of your home office.
For example if your home office is 200 sq ft, the total square footage of your home is 1600 sq ft, then your business percentage would be 12.5%. If you use this method to calculate home office deductions, then you need to input your expenses on Form 8829.
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining accounting or other financial advice from an appropriate financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.