The home office deduction used to really freak people out. There was a rumor that if you reported a home office on your taxes, it would be a red flag for the IRS to audit you.
I have good news! Since the levels of people working from their homes have increased so much with the creation of the internet, this isn’t necessarily a red flag anymore.
Another rumor I’d like to dispel is that a lot of people think that just because they don’t have an entire closed-off room for their office space, they can’t take the home office deduction. As long as you have an area that you use regularly and exclusively for business purposes, you can count those square feet as home office space. This must also be the principal place of your business.
What you can’t do is deduct your family’s dining room space just because you like to set up shop in there before and after dinner time. In that situation, the space isn’t exclusive to the business since your family also uses it for mealtime.
There are two methods for calculating your home office deduction. The simple method, which is new as of 2013, is just multiplying the square footage of your home office by $5. That amount is your deduction.
With the regular method, you calculate the percentage of your home used for business by dividing the home office square footage by the total square footage of your home. So, if your home office was a 10×10 room, the square footage would be 100. If your entire home was 1,500 square feet, you would divide 100 by 1,500. In this case, you would get to deduct 6.7% of your home office expenses by multiplying that percentage by eligible home expenses like mortgage interest or monthly rent, utilities, interest, repairs, and depreciation.
Home Office Deduction Tracking Spreadsheet
Need help tracking your home office deduction? Here is a spreadsheet that will help you track the most common deductions available to you as a small business owner with a home office.
If you have a home office and recently transitioned your business to an S-Corp, you’ll want to understand the steps you need to take in order to continue to take the home office deduction available to you. Here are the steps you need to take to deduct your home office as an S-Corp.
One last thing to mention is that if your business has a loss for the year (which means the expenses were greater than the income) you can’t increase your loss by taking this deduction, so you won’t need to worry about this calculation.
