Steps to Claim Home Office Deduction
Home Office Deduction is becoming a popular tax break with an increasing number of people working from home. It does save you a good amount of tax, but you need to follow the right steps to get this benefit. You can follow the below simple steps to getting the deduction:
Step 1. Check your Eligibility for Claiming Home Office Deduction
The first step is to check your eligibility to claim home office deduction.
To be eligible to deduct expenses for business use of your home, you must use Part of Your Home for the following purpose:
- Exclusively and Regularly :
- As your Principal Place of Business OR
- As a Place where you meet/deal with your clients, customers or patients in the normal course of business
- If the part is a Separate Structure not attached to your home, IN CONNECTION with your trade or business;
- On a regular basis for certain STORAGE OF INVENTORY
- For Rental Use or
- As a Daycare Facility
You can use the following flow chart which walks you through the questions you need to ask. This is simple to follow. In case you don’t understand some of the terms used in the flow chart, you can check the glossary here.
Home Office Eligibility Check Flow Chart
Note: This chart is not applicable if you are using home for storing inventory, rental use of home and using it as a daycare facility. There is a separate provision for these scenarios.
Source: IRS Publication
Step 2. Select your Option for Calculating Eligible Deduction
Once you know that you are eligible to claim home office deduction, the next step is to CHOOSE which option to claim the home office deduction. There are 2 options available:
Simplified Method: This is a simple and straightforward method. Just measure your home office area in square feet (Should not exceed 300 sq.feet) and multiply it by a prescribed rate which is $5 per square foot to get the eligible deduction.
Actual Expense Method: Here you need to divide the home expenses into 3 types i.e. Direct Expense, Indirect Expense, and Unrelated Expense (see below image). The logic behind this is to allow only those expenses which can be assigned to the home office.
Check the explanation below for the terms used:
Direct Expenses are expenses ONLY for the BUSINESS PART of your home.
Examples: Painting or repairs only in the area used for business.
Indirect Expenses are expenses for keeping up and running your ENTIRE HOME.
Examples: Insurance, utilities, and general repairs on entire home.
Unrelated Expenses are expenses ONLY for the parts of your home NOT USED FOR BUSINESS.
Examples: Lawn care or painting a room not used for business.
Business Percentage: It is the ratio of the Size of the Part of your home that you USE FOR BUSINESS to your WHOLE HOUSE.
Following are two commonly used methods to calculate the business percentage:
1. Divide the area of your home used for business (length multiplied by the width) by the total area of your home.
2. If the rooms in your home are all about the same size, you can divide the number of rooms used for business by the total number of rooms in your home.
• Your office is 240 square feet (12 feet × 20 feet). Your home is 1,200 square feet.
• Your office is 20% (240 ÷ 1,200) of the total area of your home. Your business percentage is 20%.
• You use one room in your home for business. Your home has 10 rooms, all about equal size.
Your office is 10% (1 ÷ 10) of the total area of your home. Your business percentage is 10%.
Note you cannot deduct more than the net profit your business makes each year. However, you can carry forward operating losses into future tax years.
Step 3. Fill in the relevant claim in your IRS returns