All About the Home Office Deduction and Its Qualifications

When so many of us get started operating a business, we’re usually not considering our office. We have a laptop on the couch while our kids watch Paw Patrol. We’re working a side hustle on our phones as we manage a traditional job. Rarely do we have some sacred space for thought and growth right from the start. 

But designating an area of your home that’s designed for the work you do can have some perks.

Aside from the obvious convenience of working out of your home, it’s also a tax deduction waiting to happen. 

If I work from home, when do I start paying taxes?

As long as you're running a business, you're required to pay your taxes and declare all your earnings to the Internal Revenue Service (IRS). The good news is that if you work from a dedicated space in your home, you may qualify for a business deduction. 

This is similar to the way you would deduct what you pay to rent an office space. Instead, you work from home and may still get to take a deduction. That coupled with the fact that you probably have better coffee is a huge win. 

How would I qualify for a home office deduction?

There are a couple of benchmarks you need to hit in order to qualify for a home office deduction. The following are just some of the most significant examples:

If you're using a part of your home for your business

Of course, your business should take place within the confines of your home to qualify for the deduction. 

Take note that you don't specifically have to use your whole house as an office space; even a single room would suffice. You also have to be utilizing this particular space on a regular basis, and all of the activities in that room should only be focused on your business transactions! The IRS defines this as “regular and exclusive use”. 

For example, you can't set up shop within your kitchen or your kid's play area since your family members also use them to do other non-business-related activities.

If that particular room is your principal space of business

Let's say that you're running a real estate business. There are times in which you'll have to go outdoors to meet with a client. This condition does not disqualify you from the deduction since your main order of business was still done within your home. 

Even before you met up with the client, they called you at home to schedule an appointment. Some clients may have even been thorough enough to visit your home office to inquire about your services and pricing! In short, as long as your home office space is your “principal place of business” you will satisfy this requirement.

How do I calculate the home office deduction?

There are two ways of doing this; the regular method and the simplified option. 

The regular method requires some calculation and knowledge of eligible expenses. Essentially, you start by calculating the percentage of your home which is used for your home office. This is the square footage of your office divided by the total square footage of your home. This percentage is then applied to eligible expenses. It is best to enlist the help of your tax professional if you are using this option as some expenses are included in this calculation and others are deducted directly as a business expense on the Schedule C (the tax form used to show the profits of your business).  

To be prepared, track all expenses in a spreadsheet that relates to your home office. Include items like utilities, rent, home owner’s or renter’s insurance, cleaning costs, and repair costs. If you are a homeowner, depreciation of your home factors into this calculation and mortgage interest as well. So provide information related to your home purchase price and mortgage to your accountant.

The simplified option is much easier but may result in a smaller deduction than the regular method. You should have a quick conversation with your tax accountant to see which method is best for you. Basically, the simplified option is a standard deduction of $5 per square foot of home used for business (maximum 300 square feet).

If you’re already operating out of a home office you might as well receive the tax benefits. A healthy financial approach to your budding business is to save wherever you can and to capitalize on tax deductions as often as possible. Taking advantage of these opportunities are a part of your growth. 

Every penny you keep in your pocket can go towards your own prosperity or be invested back into your business. Make sure your earnings are working for you at every turn! At Beam Financial Group, we’re here to provide accounting services to small businesses so they can maximize every dollar they earn.