One of the ways to protect the viability of your business is to take advantage of all tax deductions available. They can mean a significant difference in what you pay in taxes and small business owners should be familiar with the options open to them. Finding out and applying for a Home Office Tax Deduction can be complex; also, there are strict criteria that must be met. Here we make getting your home office as easy and simple as possible.
What can be claimed as Deductible Expenses?
Tax deductible expenses include mortgage interest, insurance, utilities, repairs, depreciation and more. Direct expenses like renovations for the office (and only the office) that includes costs like paint, remodeling, carpets, and similar items can be deducted in full. Non-direct expense like utilities must be calculated as a proportion of the office space in relation to the home, because such expenses are not only for your office space and separating the two is crucial.
What are the Criteria I must meet?
The IRS has clearly defined criteria that must be met. All expenses must pertain to costs relating to your business activity that are demonstrably separate from personal activity. This means that your home office must consist of a separate room/s in the house used exclusively for business purposes. Alternatively, it can be within a room used for personal purposes but in a clearly designated part of the room used exclusively for business. The type of home does not matter (duplex/apartment etc.) and there are no restrictions on numbers of inhabitants.
Two Ways to Claim your Home Office Tax Deduction
There are two different options to claim for your Home Office Tax Deduction, “The Regular Method” and the “Simplified Option”. You should choose whichever is easier and more cost effective for your circumstances. The Regular Method involves calculating expenses incurred such as heating, internet, rent etc. and submitting a total of the expenses as a proportion of the office space in relation to the home. Therefore, if your home is 200 square feet and your office is 50 square feet, you claim for 25% of your costs incurred.
The Simplified Option is designed to be more straightforward, allowing you to calculate the amount by simply multiplying the square footage of your office space by a figure given by the IRS. It is up to you to decide which will be more beneficial to you. The far easier option however, is the “Simplified Option.”
Choose the Simplified Option If…
Choose the Simplified Option if your home office is less than 300 square feet. This allows you to claim $5 per square foot of office space. For small businesses run from home in a spare room, this is ideal. Most experts recommend that if you have small home office of less than 100 square feet, you are better off using the simplified option.
Choose the Regular Method If…
If you have an office space of more than 100 square feet, can accurately record and present your expenses, are willing to have them scrutinized by the IRS and are able to wait longer to receive the tax deduction then choose the regular method. For office spaces of more than 100 square feet, you will usually receive a greater reduction than with the simplified method.
Be Careful when Claiming for Depreciation
If you choose the Regular Method and claim for tax reductions for office depreciation, then this has implications on capital gains tax. In short, the amount you claim in tax deduction for depreciation is liable for tax when you sell your home. This is something important to consider. Read more here
What can be claimed as Deductible Expenses?
Tax deductible expenses include mortgage interest, insurance, utilities, repairs, depreciation and more. Direct expenses like renovations for the office (and only the office) that includes costs like paint, remodeling, carpets, and similar items can be deducted in full. Non-direct expense like utilities must be calculated as a proportion of the office space in relation to the home, because such expenses are not only for your office space and separating the two is crucial.
What are the Criteria I must meet?
The IRS has clearly defined criteria that must be met. All expenses must pertain to costs relating to your business activity that are demonstrably separate from personal activity. This means that your home office must consist of a separate room/s in the house used exclusively for business purposes. Alternatively, it can be within a room used for personal purposes but in a clearly designated part of the room used exclusively for business. The type of home does not matter (duplex/apartment etc.) and there are no restrictions on numbers of inhabitants.
Two Ways to Claim your Home Office Tax Deduction
There are two different options to claim for your Home Office Tax Deduction, “The Regular Method” and the “Simplified Option”. You should choose whichever is easier and more cost effective for your circumstances. The Regular Method involves calculating expenses incurred such as heating, internet, rent etc. and submitting a total of the expenses as a proportion of the office space in relation to the home. Therefore, if your home is 200 square feet and your office is 50 square feet, you claim for 25% of your costs incurred.
The Simplified Option is designed to be more straightforward, allowing you to calculate the amount by simply multiplying the square footage of your office space by a figure given by the IRS. It is up to you to decide which will be more beneficial to you. The far easier option however, is the “Simplified Option.”
Choose the Simplified Option If…
Choose the Simplified Option if your home office is less than 300 square feet. This allows you to claim $5 per square foot of office space. For small businesses run from home in a spare room, this is ideal. Most experts recommend that if you have small home office of less than 100 square feet, you are better off using the simplified option.
Choose the Regular Method If…
If you have an office space of more than 100 square feet, can accurately record and present your expenses, are willing to have them scrutinized by the IRS and are able to wait longer to receive the tax deduction then choose the regular method. For office spaces of more than 100 square feet, you will usually receive a greater reduction than with the simplified method.
Be Careful when Claiming for Depreciation
If you choose the Regular Method and claim for tax reductions for office depreciation, then this has implications on capital gains tax. In short, the amount you claim in tax deduction for depreciation is liable for tax when you sell your home. This is something important to consider. Read more here
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