Getting The Most Out Of Your Home Office At Tax Time

Many people turn away from deducting a home office because they fear it’s a “red flag” for the IRS. However, as long as you follow good business practices and BollitProof’s innovative tax strategies, you can rest assured that you’re getting the most out of your home workspace without being subjected to any additional scrutiny.

A lot of business owners can’t afford or don’t want the expense of renting an office space, so they choose to work from home. According to BollitProof founder Randall S. Boll, this creates an opportunity to reduce your taxable income. The home office deduction often gets a lot of negative attention because so many people have taken advantage of it in the past, but the key is to make sure your work area is used exclusively for business – you can’t use your kitchen because you also cook and eat there. There are two basic requirements for your home to qualify as a deduction: 

1. Regular and Exclusive Use. You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.

2. Principal Place of Your Business. You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. If you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business. You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn if you use it exclusively and regularly for your business. The structure doesn’t have to be the only place where you meet patients, clients, or customers, but it has to be your primary place of business.

How to take advantage of the home office deductions: 

The 8829 tax form called The Business Use Of Home is fairly self-explanatory, but Randall S. Boll highlights a couple of key points you need to hit: “1. Determine the square footage of your workspace and divide it against the total square footage of your house. If your office is 400 square feet and your home is 2000 square feet, your office space makes up 20% of your home. That’s the percentage you’ll use to fill out the rest of the form, so it’s important to get this right. 2. Take all of your general home expenses (utilities, maintenance, and property taxes) for the entire year and deduct 20% of those expenses on your Schedule C of your personal 1040 tax return.”

Important note: Do not include any business expenses into your home office deduction. A lot of people confuse business expense deductions with home office deductions. If you buy a stapler, a pen, or a whiteboard, they are home office expenses, or general and administrative expenses, which are a business deduction. Whereas, the home office deduction is a personal deduction on your 1040 tax return.

Comparison of methods

The IRS has a simplified home office deduction offer if you don’t want to go through the hassle of doing a lot of math. It lets you claim a standard $5 per square foot of office space deduction, but your workspace must be less than 300 square feet. The simplified method is easier, but Randall S. Boll knows that using form 8829 gives you an opportunity to make more deductions.

Simplified OptionRegular Method
Deduction for home office use of a portion of a residence is allowed only if that portion is exclusively used on a regular basis for business purposes.Same
Allowable square footage of home use for business (not to exceed 300 square feet).Percentage of home used for business.
Standard $5 per square foot used to determine the home business deduction.Actual expenses determined and records maintained.
Home-related itemized deductions claimed in full on Schedule A.Home-related itemized deductions apportioned between Schedule A and business schedule (Sch. C or Sch. F).
No depreciation deduction.Depreciation deduction for a portion of the home used for business.
No recapture of depreciation upon sale of a home.Recapture of depreciation on gain upon sale of a home
The deduction cannot exceed gross income from business use of home less business expenses.Same
Amount in excess of gross income limitation may not be carried over.Amount in excess of gross income limitation may be carried over.
Loss carryover from the use of the regular method in the prior year may not be claimed.Loss carryover from the use of the regular method in the prior year may be claimed if the gross income test is met in the current year.

Whichever method you choose, the home office deduction is a valuable tool for business owners to pay fewer taxes and beat the IRS.