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Tax Season Tips: How to Get a Home Office Deduction

Got a business? If you do, then chances are you probably also qualify for a home office tax deduction.

There are only two requirements to taking a home office deduction. You need a space that is regularly and exclusively used for your office. (There’s even an exception to this that I’ll talk about in a little bit.) You don’t need to have a separate entrance. It doesn’t need to be your only place of business. All you need to pass are two rules: regular and exclusive use.

Do you qualify for a home office deduction?

Regular use of your home office could mean that you check your email on a daily basis before you leave for your other office. It might mean that you keep some confidential files and paperwork in your home office. It could mean that you telecommute on a regular basis. Or, it might mean that your business is pretty much virtual, and that’s the only office you have.

Exclusive use means that you have a space that is used just for your home office. It’s not a corner of the dining room table or the family room. It’s a separate bedroom, the basement, or some other space that is exclusively used for the business.

There is an exception to the exclusive use requirement. If you store inventory in your home, you can use just a corner of another space in that case. So, if you store marketing materials in a corner of your garage or products you’re selling along the wall in your family room, you’re still eligible for the deduction.

How do you calculate your home office deduction?

Once you’ve established that you qualify for the home office deduction, you next need to calculate how much you can deduct. Start by calculating your business square footage and the total square footage of your house.

At this point, you can make a choice. You can take the simplified home office deduction which is $5/square foot up to a maximum of $1,500 for the year. Or, you can calculate how much the actual deduction would be.

Without even seeing the numbers, I bet you’ll get a bigger deduction if you do the extra work and calculate it. There is one more benefit to doing the extra work. A home office deduction can’t push your business into a loss. If you take the simplified method, it’s use it or lose it. If you go through the actual calculation, you can roll the unused home office deduction into future years when it can be used against income.

In order to calculate the actual home office deduction, you need a list of indirect expenses and your business use percentage.

Indirect expenses are costs for your house: mortgage interest (or rent), property tax, insurance, HOA dues, utilities, maintenance, landscaping, repairs, and the like. You can also take a deduction for direct expenses. These are expenses directly related to your home office such as flooring, painting the office, and installing shelves.

You can also take a depreciation deduction, but all of the depreciation will need to be recaptured when the house is sold. The other home office expenses do not need to be recaptured when you sell the house.

None of this works unless you have a business. If you don’t have a business, start one today. It will be the single best way you have to pay less in taxes.