Claim the Home Office Deduction

By Karol Haugan

Small business owners often fail to claim the home office deduction. Perhaps they feel that claiming the tax deduction makes them a target for an audit or they simply don’t have the right tax advisor. The latter was my case many years ago when I had no idea that my small business would eventually push me to pursue a career in tax accounting.

Let’s get back to the home office deduction. The IRS recently reminded taxpayers running their businesses from home to take the deduction. However, in order to qualify for this tax benefit, you must use an identifiable space of your home — exclusively and regularly — to conduct your business-related activities.

If you qualify to take the home office deduction, the IRS allows you to deduct expenses related to the business use of your home including rent, utilities, real estate taxes, mortgage interest, depreciation, insurance, and maintenance.

The regular and simplified methods may be used to claim the home office deduction.

  • Regular Method

The regular method basically allocates the total expenses of using your home between your personal and business use. To calculate your business percentage use, divide the square footage used for your business by the total square footage of your home.

Remember, direct business expenses are fully deductible. You only apply the business percentage use allocation to claim indirect expenses.

Also, if you elect the regular method, make sure you maintain good records of your home office-related expenses.

  • Simplified Method

In 2013, in an effort to avoid the complexity of the regular method and the burden of recordkeeping, the IRS provided business owners with the simplified method to claim the home office deduction.

With the simplified method, you can deduct $5 per every square foot (up to 300 square feet) of your home if you’re using it for business.

An important factor to consider when claiming the home office deduction is that “regardless of the method used to compute the deduction, business expenses in excess of the gross income limitation are not deductible.”*

In addition, if you own your home and elect to claim the home office deduction using the regular method, which allows you to take depreciation for the business use of your home, keep in mind that there will be other tax implications if you eventually sell your home.

Please consult with your Untracht Early advisor for further details.

*“IRS: Home Office Deduction Often Overlooked by Small Business Owners” IR-2017-96, Internal Revenue Service Publication 587 (May 5, 2017).