If you own a business and work from home, you’re going to want to know about this important tax deduction.
If you are a business owner who uses your home frequently for exclusively business related activity, you are able to write off associated rent or mortgage, utilities, real estate taxes, repairs, maintenance, and other business-related expenses.
The deduction can be taken on any type of home, whether you rent or own.
This includes: single-family, apartment, condo, and even a houseboat.
The home office deduction also can apply to freestanding structures as well, like a studio, garage, or barn space, as long as the structure meets the “exclusive and regular use” requirements below.
The home office deduction cannot, however, be used for a hotel or any other form of temporary lodging.
Conditions That Need To Be Met
To qualify for the home tax deduction, you must meet two criteria: regular and exclusive use, and principal place of business.
Regular and Exclusive Use
The space you are writing off must be EXCLUSIVELY used for conducting business. If you are using an extra bedroom in your house for both an office and a playroom, for example, it will likely be deemed as ineligible.
However, there are two exceptions to the regular and exclusive use rule:
If you provide care services for children, elderly over 65, or handicapped individuals in a portion of your house, you should be able to claim the business deductions. However, ensure that you have the proper licensing, certification, or approval as a daycare.
If you use your office for storage of inventory or product samples you sell in your business.
Principal Place of Business
While you may occasionally meet clients and customers in other places, your home office must be your principal place of business. For example, you use your home office for regular business administrative or management activities, such as billing customers, setting up appointments, keeping books and records.
Determining Your Home Office Tax Deduction
There are two ways that you can determine the amount of your home office tax deduction.
1. You can use a specifically formula outlined by the IRS:
Square footage multiplied by a prescribed rate.
As of 2023, this rate is $5 per square foot up to 300 feet of space.
2. You can measure the actual expenditures of your business against your overall residence expenses.
For this, you would add up all your household expenses like mortgage interest, taxes, maintenance, repairs, insurance, and utilities, and divide it by how much of your home is being used exclusively for your business.
To figure out what expenses you can deduct, check out Form 8829 or talk to your tax professional.
When to Call an Accountant
As a business owner, it’s important to meet with your tax strategist at least once a quarter to make sure that you’re leveraging as many deductions as possible and in the right way.
If you have a home office, give us a call at Paragon Accountants and we can help you figure out how much of it you can write off.