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Home Office Deduction: Business Tax Write-Off Breakdown

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home office deduction

Home Office Deduction: What You Need to Know 

It’s becoming more common for people to work from home. From freelancers to employees who work remotely, the convenience and cost-effectiveness of it is a big pull away from the traditional office. A large number of small businesses also start at home. 

If you’re self-employed and among this group, you may be eligible for a home office tax deduction for your home office expenses. Many people are unsure of how to go about it or are afraid to apply, but a tax break can provide significant relief to cash flow and should be taken advantage of.

Here’s a simplified home office deduction guide for small businesses who are considering it. 

Home Office Tax Deduction Qualifications

Previously, employees who worked from home could claim home office write offs by recording these expenses as unreimbursed employee business expenses. But the Tax Cuts and Jobs Act of 2017 eliminated this, causing a lot of confusion. 

From 2018, the requirements you’ll need to meet to claim home office deductions include: 

  • Regular and exclusive use

You must have a dedicated section of your home for business purposes only. This area doesn’t have to be a separate room, but no other activities can be done there. For example, if you use the dining room as an office during the day and eat there off the clock, it doesn’t qualify as a home office. 

Regular use means you must be able to show that your house is your primary place of business. You also qualify if you work from home for a few hours every day.

  • Principal place of business

Your home office must be the principal location of your business meaning it is where you conduct administrative or management chores and meet with customers or clients regularly. An exception to this rule is if your office is in a separate, unattached structure and you meet the regular and exclusive use requirements.

What Can Be Deducted?

What and how much can you deduct for home office expenses? The size of the tax break depends on the option you use to calculate your deduction. There are two methods: The simplified option calculates the figure per the size of your home office, while the standard option, or actual expense method, allows you to calculate according to specific bills including: 

  • Rent or mortgage interest
  • Homeowners or renters’ insurance
  • Utilities such as your electric, water and gas bills
  • Property taxes
  • Depreciation
  • Renovations and repairs of the office 

A full list of eligible expenses is available on the IRS publication on Business Use of Your Home. Remember to keep receipts of these expenses in your tax files if you plan to claim for them.   

Calculating Your Home Office Deduction

Here’s how to deduct home office expenses using the two methods.

  1. Simplified Version

This method works well for single-room offices and small operations. It uses a prescribed rate of $5 per square foot, multiplied by the allowable square footage used in the home to a maximum of 300 square feet. 

For example, if your office is 150 square feet, your home business deduction will be $750.

  1.  Actual Expense 

The regular method requires that you keep a record of your household expenses, also called indirect expenses. The amounts are deductible based on the percentage of your home designated for business. 

For example, if your office takes up 15% of your home, and your indirect expenses such as rent, utilities, and insurance total up to $3,000, you are eligible for 15% of $3,000 which is $450. 

You can claim direct expenses such as renovations and repairs to your office in full. If it cost you $300 to paint your office, you are entitled to $300 in deductions. Your total home-based business tax deductions will be the sum of the two types of expenses.

Helpful Tips

Besides knowing how to write off home office expenses, be mindful of the following:

  • Keep your receipts of all the expenses you think you’ll deduct if you’re planning to use the actual expense method of calculation. These include bills, expenses such as rent, and any purchases. If you’re ever audited by the IRS, you’ll have records to back your claims. 
  • Your home office deductions cannot exceed your business income as the law limits how much you can claim to prevent a tax loss. 
  • You cannot claim miscellaneous expenses as per the home office deduction 2017 IRS-provided worksheet under the Tax Cuts and Jobs Act. 
  • If you’re a homeowner and include depreciation in your expenses, you will be required to pay a capital gains tax if you sell the house for a profit. The tax is calculated on the total amount of depreciation deductions you took while living there.  

From tax breaks to business loans, taking advantage of all forms of financial relief is important for businesses. At L3 Funding we understand the challenges small businesses face, that’s why we offer multiple merchant funding options with simple approval processes. 

Talk to us today to find the best solution for your business.