Home Office Deduction, Not Just for Homeowners
- Nov 27, 2024
- 4 min read
Most of us business owners find ourselves spending countless hours at the office, only to go home and spend the evening doing admin tasks. Because of this, the home office deduction is extremely popular and should be used in some capacity. Don't own a home? Your in luck, the IRS provides guidance on how to take the home office deduction whether you own a home or rent. There are two primary methods for taking the home office deduction, the simplified and regular methods. Before we dive into these, lets go over the requirements to claim the deduction.
Do I Qualify for This Deduction?
This deduction can be claimed on Form 8829. I have outlined the requirements below to simplify the process:
The space must be dedicated to business, which means that there cannot be recreational activity conducted in the area.
This may be an extra room in your home, or a designated space within a room. For example, 40 sq ft of my 120 sq ft room is used for the home office deduction. This includes a desk and a computer with a few monitors and office supplies.
Your home doesn't have to be your principal place of business to claim the deduction. This is true even if you rent an office space.
The IRS definition of "home" includes the following owned or rented spaces:
House
Apartment
Condominium
Mobile Home
Boat or similar property
Other structures on the property (ADU, Detached Garage, Outbuildings, etc.)
Owner Tip: Even if you have office space that you rent, you can still claim the home office deduction as long as you have a space exclusively used for business.
Simplified Method
This method is pretty cut and dry, you measure out your home office space (space exclusively used for business) and multiply that number by 5. For example, since I have a home office that is only 40 sq ft, under this method I would only get a 120.00 deduction. Additionally, your deduction is capped at 1,500.00. If your home office is larger than 300 sq ft, consider using the regular method. The drawback to this strategy is that it typically results in a smaller deduction than the regular method, and it results in depreciation recapture in the event that you sell the house. If you are renting, you don't have to worry about depreciation recapture. The upside to this method is that your audit risk is extremely low, so if you don't have solid numbers for the regular method then consider taking the simplified deduction.
Employee Tip: With remote working becoming increasingly popular, many employees decided they were eligible for this deduction in 2020 and 2021. The IRS fired back stating explicitly that employees are not allowed to take this deduction. However, if you are a homeowner you can still claim property taxes, mortgage interest, and homeowners insurance (but not PMI) on Schedule A (Itemized deductions).
Owner Tip: Using the home office deduction can increase your mileage deduction. How so? By claiming a home office, you have no commute to work. That opens up the opportunity to record more business mileage. If you don't want mail coming to your home, consider getting a PO box. And by the way, your mileage from your home to the PO box will also be deductible using this method.
Regular Method
This deduction yields a much more effective result, and isn't that complicated. To build off my example earlier, lets say that I live in a 950 sq ft house. With my home office being 40 sq ft, I can divide 40/950 to calculate the business use of my home (4.21%). Lets run through an example and see what kind of deduction you can get using this method:
Mortgage Interest - 10,000.00*.0421= 421
Property Taxes - 3,000*.0421= 126.30
Utilities - 2750*.0421= 115.78
Repairs - 1500*.0421= 623.15
Telephone - 1200*.0421= 50.52
Total Deduction: 1,336.75. If you have an average tax rate of 20 percent, this deduction saves you 267.00 dollars.
Note: If you are a renter, replace mortgage interest with your rent payments and ignore the property taxes line. If your slumlord forced you to make any repairs to your home, make sure to deduct those as well.
Owner Tip: Don't double dip. If you use the regular method, make sure you don't run on autopilot and also deduct the full amount of mortgage interest and property taxes on your 1098 that you received from your lender. In the example above, you would multiply the mortgage interest, property taxes, and homeowners insurance by .9579 and plug these values into your Schedule A (itemized deduction). Also, if you are deducting your phone bill through the business, make sure you don't deduct it again for the home office deduction.
Which Option is Best for Me?
As an accountant, my answer will always be "it depends". If you pay rent for an office space, consider using the simplified method for your home office deduction. However, paying for an office space does not disqualify you from claiming the regular method as long as you can prove you have a designated work space in your home. If you do not have a commercial office space, I would suggest you use the regular method and get more aggressive with your home office deduction.
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