Self-employed individuals can use a portion of their home in order to conduct business as a home office. Whether you rent or own your home, both are eligible to claim a home office. The IRS defines a home office using these two requirements:
- The home office must have a regular and exclusive use for your business
- The home office must be in your principal place of residence
There are certain expenses taxpayers can deduct when claiming a home office. Expenses you can claim are below:
- Mortgage Interest
- Insurance
- Utilities
- Repairs and Maintenance
- Rent
- Depreciation
When it comes to claiming a home office, you must keep in mind what deduction you want to take. The two types of deductions you can claim are called the simplified method and the regular method.
The Simplified Method:
The simplified method gives the taxpayer a rate of $5 per square foot for the size of the home office. This method disregards the expenses listed above pertaining to the home office. This method takes the size of your home office in square feet and multiplies that number by $5 to get the amount of your deduction. For example, if you had a 200 square foot home office, your deduction would be calculated as 200 square feet x $5 for a deduction of $1,000.
This method has a maximum deduction of $1,500, or 300 square feet.
The Regular Method:
The regular method is more complex and harder to calculate. For this method you take the size of the home office in comparison to the size of your home and find the corresponding percentage. For example, if the size of your home office is 100 square feet and the size of your home is 1,000 square feet, the percentage would be 10%. Next, you take all the expenses from above, and allocate 10%, or the corresponding percentage, of the expense to the home office.
The regular method also involves depreciating your home over the span of 39.0 years. This involves determining the fair market value of your home and allocating the value between your home and the land it’s on. If you were to sell your home for a gain, you will need to recapture the depreciation, which is treated as ordinary income and you will be taxed on the amount of that gain. If you rent your home, you will not have to depreciate your home since you are not the owner of that rental and you may choose what method is more beneficial for you. It is best to consult with your tax firm to calculate this method.
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