The Home Office Tax Deduction: What You Should Know
With tax day right around the corner, business owners across the country are scrambling to find those last-minute deductions. While the exact deductions for which you are eligible will vary depending on your type of business, one of the greatest deductions is often the home office. Assuming you work from home, either partially or fully, you can deduct this expense from your taxes.
For tax years 2012 and prior, business owners were required to use an old method for calculating their home office deduction. This consists of calculating the actual expense of their home office, including mortgage/rent, insurance, electricity, gas, water, repairs, etc. But keep in mind that only the portion used for business-related activities can be deducted. So if you only work from your home office — and your office is 1/4 the size of your entire home — you would calculate the deduction by adding up all of the aforementioned bills and dividing it by four. As you may have guessed, this method was somewhat confusing and tedious, which is why the IRS began offering an alternative method for calculating home office deductions for tax years 2013 and later.
The new method simplifies the process by eliminating the need to calculate all of your expenses (e.g. mortgage/rent, utilities, etc.). Instead, business owners can calculate their home office deduction based on the square footage of the space used for business-related purposes and activities. If you work in a home office that’s 250 square feet, for instance, you simply multiply 250 by the prescribed factor, which for the tax year 2015 is $5. 250 by 5, is $1,250, which is how much you can deduct for your home office.
Of course, business owners can still use the old method if they prefer. However, the new method simplified the process by clearing out the otherwise confusing task of having to calculate all of your home office expenses. This is why it’s generally the preferred choice for small business owners who work at home.
To learn more about the home office deduction and how it works, check out the official IRS webpage here.
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