What to Know About Claiming Home-Office Deductions - Bookkeeping 101

Paying taxes is one thing, dealing with tax responsibilities is another. It can be troublesome for a regular taxpayer during tax time but even more so if you’re self-employed and have to deal with the tax return yourself.

On that note, we have some good news for you. If you own or manage a home office, there’s a way that you can claim more deductions and reduce your taxes. Keep reading to learn how to be eligible and how to calculate your deductions.

Eligibility for Home-Office Deductions

Whether you’re a homeowner or a renter, you can claim home office deductions. In terms of eligibility, there are essentially two requirements you need to meet:

●     The part of the home serving as an office must be used regularly and exclusively for business operations.

●     The home office must be the principal place of business. As long as it’s used regularly and substantially for business, you can claim deductions, even if you’re doing business away from home.

Be advised, however, that there are notable exceptions to this rule. For instance, if you use part of your home for business storage, then that’s not qualified for home deductions. [f1] 

Calculating the Home-Office Deductions

When it comes to calculating your deductions, there are two methods that you can use:

●     Percentage Method: In the percentage method, you need to calculate the percentage of your home that is allocated to your home office and apply that percentage to your eligible expenses. One common method is to calculate the area of space for your home office over the total size of your home. Measure the approximate area of your home office space (in square footage) and divide that by the total area of your home. For instance, if your home is 500 square feet and your designated home office is 100 square feet, you can deduct 20 percent (100 ÷ 500) of your expenses.

●     Simplified Method: The other method is a simplified option. In this simpler method, you use a set rate multiplied by the square footage of your home office. If the set rate is $5 per square foot to a maximum of 300 square feet, using the above example, your deduction will be $500 if your home office is 100 square feet. The simplified method is much easier to calculate.

Types of Expenses to Deduct

For the home-office deductions, one must know the two types of expenses to deduct: direct and indirect expenses:

Direct Expenses: These expenses can be deducted in full as they apply solely to the home office part of your home:

●     Cleaning

●     Repairs and maintenance

●     Dedicated telephone line

●     Professional web page expenses, domain hosting fees, and others.

●     Advertising and business cards

●     Office supplies

●     Business equipment

Indirect Expenses: These expenses apply to the upkeep and operation of your entire home, based on the percentage of your home devoted to your business:

●     Rent

●     Mortgage interest

●     Property taxes

●     A homeowner or renter insurance

●     Homeowner association fees

●     General repairs and maintenance

●     Utilities and services, including heat, electricity, and internet

●     Security system

Ultimately, under the right circumstances, a taxpayer who works from home can claim home-office deductions. If you are self-employed and have a home-office business, consider all the valuable information mentioned above, and you’ll be on the right track.

If you’re looking for Bookkeeping by QuickBooks Certified ProAdvisors, get in touch today! We’re happy to help.

Kelly Gonsalves