Everything to know about home office deductions  

Like thousands of people, you might have switched to working from home, since the pandemic came in. Companies worldwide switched to this mode because it was the need of the hour. Indeed, you might have saved a lot of expenses like commuting and coffee expenses. But a few other costs are added to your account while you are working at home. For instance, there is extra electricity consumption, depreciation of furniture, system, and printing papers. However, if you use personal resources for official purposes or your home space for office use, you are eligible for a home office tax deduction.

This has been the most legit way to bring your taxable income down. You can directly deduct expenses that go into maintaining your home office. You can also remove home-related costs that are not deductible for the average homeowner.

Besides, you won’t have to worry about expense classification or allocation if you use the new Simplified Method to calculate your home office deductions.

Who Is Eligible for the Home Office Tax Deduction?

You can deduct your home office expenses from your business income if:

  • your office qualifies.
  • People who work from home full-time
  • freelancers’
  • and those who have only been self-employed for a few months are all included.
  • If you were self-employed and worked from home for a few months while looking for a full-time job.

To qualify for all the above cases, you must have some income under Schedule C (from self-employment)

Rules for your home:

Firstly, To be eligible, you must use a portion of your home or apartment regularly to conduct this business. You must use a part of your home “regularly and exclusively” for business to qualify for the home office tax deduction. However, it is not necessary that your office has to be in a separate room; the only clause is that it just needs to be a part of your house where you don’t do anything else except the business for which you are claiming the deduction.

Maybe, It could be a dedicated little desk corner in the basement or a part of your drawing room. But this area will not include a place like a kitchen that has some other purpose or where your entire family eats. At times, there are different Structures on your property, like the studio or garage, which are also included in the calculation. Altogether, “You don’t need a wall to separate it; if you have a designated area for your home office and nothing else is done there, you have an exclusive area.”

However, the calculation excludes the portion of the property that is used solely for a commercial purpose. For instance, if you have any hotel, guest stay facility, or retail business, this part of the property will not be included

Secondly, your home office must be either the primary location of your business or a place where you hold meetings with customers or clients regularly. Daycare and storage facilities are two exceptions to this rule.

What is the definition of a business when referring to this deduction?

Like the regular-use test, the facts and circumstances will determine whether your work qualifies as a business. The greater the amount of time, effort, and revenue generated by your activities, the more likely you will pass the test.

Making money from your efforts is essential, but profit alone does not always qualify you for this tax break. You cannot claim home office tax deductions if you use your home to manage your investment portfolio. Since this activity is personal, it will not qualify for a deduction.

Here is an example- The status of a home office may be available to people who use home offices to manage rental properties, but only as property managers, not as investors. The bottom line is that anything that fulfills your interest will not count in this deduction.

How do you figure out how much you can deduct for your home office?

You have two options for determining the value of your deduction:

Firstly, you have the simplified option: with this method, you won’t be able to deduct actual expenses. Your space’s square footage is multiplied by a predetermined rate. For up to 300 square feet of space, the rate is $5 per square foot.

The traditional method. It determines the value of your home office by comparing actual expenses to your overall residence expenses. This gives you the most appropriate figure.

Tip: If crunching percentage numbers sounds like too much work, you can use the simplified method instead of crunching percentage numbers for your business expenses. For taxpayers, the IRS provides a streamlined process for calculating home office deductions. Form 8829 can be used to figure out what fees you can deduct.

What other expenses can be claimed for home office tax deduction?

If they are listed as business expenses on Schedule C, the purchases made for a home office are deductible. Printers, office desks, and chairs are some examples of “home office” expenses that may be deductible.

To be fair, you must keep track of all of your business expenses and receipts to ensure that you can back up your purchases with proof if you are audited at any point in time.

What if your company only has one home office and you work from home most of the time?

Keep in mind that your home office should serve as your primary place of business rather than your primary place of employment. If you use your home office for administrative or management tasks and don’t use any other fixed location for those tasks, you can pass this test.

Even if you spend much more time at work as an employee, if you’re an employee of another company that runs a part-time business out of your home, you can pass this test.

The bottom line:

The most important consideration is whether an expense is routine and necessary for your business. The items purchased for home office work purposes could be justified, and you could include that expense in your tax filing. Small-business owners and entrepreneurs can save money with a home office tax deduction if they meet the IRS’s requirements and keep good records.

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