In the last post on home office deductions in the United States, we talked about how any area of your home you deduct must pass an exclusive use test, essentially meaning that you use that part of your home only for business. Read it if you want to know more about that. Here we will talk about the home office deductions you will use often. There are two, just like with deducting miles driven for your business.
The Simple Method
It’s called simple because… well, the IRS is very matter-of-fact when it comes to naming. It’s SIMPLE. Take the area you use exclusively for your business and figure out the square feet of that area. Multiply that by $5 per square foot. That is the amount you can deduct every year under the simple method, up to a 300 square feet maximum. In other words, if you use two rooms in your home for your business, adding up to 314 square feet, you can deduct 300 of those square feet for a $1500 deduction each year. (300sq ft. X $5).
This might seem small to many people, but gives you something you can use quickly and easily. It’s great for content creators, startup etsy sellers, amazon FBA, home-based massage therapists, and others. They have a dedicated space just for their business, but either their income is irregular in the beginning or they just don’t want to track everything right now.
The downside is you can’t deduct any actual expenses involved in the use of your home, including depreciation.
Let’s go to the second method: the actual expense method
The Actual Expense Method
The actual expense method takes paperwork, but is far better for businesses that have evolved beyond the experiment stage and have moved to the side-hustle or part-time business level or beyond. If your income is greater than 3-5k a year, it is probably better to do this one.
It takes more paperwork, but it doesn’t need to be complicated. You just need two things:
- Knowledge of whether an expense is direct, indirect, or unrelated (to your business) and
- The percentage of your home used for business (exclusively)
Let’s handle the second one first because it’s the easiest. If you have a 1200 square foot home and you use 300 square feet for your business, divide 300/1200 and you get your percent, in this case 25%.
Let’s handle direct, indirect, and unrelated expenses.
Direct. These are expenses you only pay for your business. If you are a doctor who meets patients in your home, this might be a blood-pressure machine, for example. It could also be painting or repairs used for that area of the business (like carpeting for a conference room). These can be deducted in full.
Indirect. These expenses are for your entire home. With these you multiply the expense by the percent of your home that is used for business. These are the ones you clicked on this post to read about:
- Insurance
- Gas
- Electricity
- Rent/Mortgage
- General Repairs
- Security System
- Real Estate Taxes
- Depreciation!
Depreciation
Depreciation is its own beast and will be written about in a future post. For now, just know you need the following things to make it work:
- The time you started using your home for business purposes (down to the month and year)
- The adjusted basis and fair market value of your home (not including the land) at the time you started using it for your business
- The costs of improvements you made to the home before and after you started using the property for business.
- And, of course, the percentage of your home used for business.
If you’re doing the actual expense method, I can help you as your bookkeeper. A second set of eyes can catch errors early, help you capture those home office deductions, and save you 80+ hours a year compared to doing it yourself. I even cost less than hiring someone in house. What’s more, I operate a home-based business as well and am more attuned to the needs of home-based business owners. Schedule today for a free consulting call.