The IRS “home office deduction” is a tax break available to individuals who use part of their home regularly and exclusively for business purposes. If you are self-employed or run a business from your home, this deduction allows you to deduct certain home-related expenses, which can reduce your taxable income.
To qualify for the home office deduction, you need to meet the following requirements:
- Exclusive and Regular Use
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- Exclusive use: You must use the part of your home exclusively for business purposes. For example, if you have a room that is both your office and a guest room, you cannot claim the deduction for that room.
- Regular use: The space must be used on a regular basis for your business activities. If you occasionally work in your home office but don’t use it regularly, you may not qualify.
- Principal Place of Business
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- Your home office must be your primary place of business. This means you conduct most of your business there, or it’s where you meet clients or customers regularly. If you have another office or location where you conduct business, the home office still qualifies if the business use of your home is significant.
- Separate Structure (Optional)
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- If your home office is in a separate building from your main home (such as a detached garage or studio), you don’t need to meet the “exclusive and regular” use requirement within the home itself, but you do need to show the space is used for business.
Types of Deduction
Once you qualify, there are two ways to calculate your home office deduction:
- Simplified Method:
- The IRS offers a simplified method that allows you to deduct $5 per square foot of your home used for business, up to a maximum of 300 square feet. This gives a maximum deduction of $1,500.
- Regular Method:
- Under the regular method, you calculate actual expenses related to your home office. This includes a percentage of your rent or mortgage interest, utilities, property taxes, insurance, and depreciation on your home. To figure out the percentage, you divide the square footage of your home office by the total square footage of your home.
What Expenses Can You Deduct?
- Direct expenses: Expenses that are only for office space, like office furniture or supplies, are fully deductible.
- Indirect expenses: Expenses that benefit the entire home, like electricity or internet, can be deducted based on the percentage of your home used for business.
Record-Keeping
It’s important to keep thorough records, including receipts, bills, and details about the area of your home used for business. This documentation will be crucial in the event of an audit.