The Indubitable Benefits of Having a Home Office: Tax Savings Edition

Having a home office can provide many benefits, including convenience, flexibility, and cost savings. But did you know that having a home office can also offer significant tax benefits? If you’re self-employed or if you use a portion of your home regularly and exclusively for business purposes, you may be eligible to claim home office expenses on your tax return.

This article covers some of the tax benefits or savings offered by the Internal Revenue Service, but should not replace evaluation of what you qualify for and a review of the IRS statutes. We have resources linked at the bottom of the article, and please consult a tax professional for further advice.

What Types Of Tax Benefits Should You Consider?

Here are some of the tax benefits you can receive by claiming home office expenses on your tax return:

1. Deductible Expenses:

The expenses related to the business use of your home are tax-deductible. These deductions can significantly reduce your taxable income, which can lower your tax bill. The expense must be directly related to the use of your home as your principal place of business. These expenses can include things like:
  • rent or mortgage interest,
  • property taxes,
  • utilities,
  • insurance,
  • repairs and maintenance,
  • and depreciation.

Haymaker hopes you found these tax tips useful if you office at home! Please consult a tax professional for further advice.

2. Depreciation Deduction:

If you own your home, you may be able to take a depreciation deduction for the business portion of your home. This can provide a significant tax benefit over several years.

3. Increased Home Sale Exclusion:

If you sell your home in the future, you may be eligible for an increased exclusion from capital gains tax if you’ve been using a portion of your home for business purposes. At the time of this article’s writing, it is $250,000 for single taxpayers and $500,000 for married taxpayers.

4. Self-Employment Tax Deduction:

If you’re self-employed, you’re responsible for paying both the employee and employer portions of Social Security and Medicare taxes. However, if you have a home office, you may be able to deduct a portion of these self-employment taxes on your tax return.

How To Calculate Your Home Office Expenses

Two methods are used to calculate the home office expenses, the Regular Method and Simplified Method.

Regular Method:

Under the Regular Method, you must calculate the actual expenses for the business use of your home. To do this, you’ll need to determine the square footage of the space used for business and the total square footage of your home. You’ll then calculate a percentage based on this information, which will be used to allocate your home expenses between personal and business use.

Simplified Method:

Under the Simplified Method, you simply multiply the square footage of your home office by a prescribed rate set by the IRS, which is currently $5 per square foot, with a maximum of 300 square feet. This means that the maximum amount you can claim using the Simplified Method is $1,500.

Be Aware Of Several Limitations As Well

While the tax benefits of having a home office can be substantial, there are also some limitations you need to be aware of. Here are a few:

Principal Place of Business:

To claim home office expenses on your tax return, your home must be your principal place of business. This means that you must regularly and exclusively use a portion of your home for business purposes. If you have another location that you use more often for business, you won’t be able to claim home office expenses.

Exclusive Use:

The portion of your home used for business must be used exclusively for that purpose. This means that you can’t use the space for any personal activities.

Reimbursed Expenses:

If your employer reimburses you for any home office expenses, you can’t deduct those expenses on your tax return. This is because you’ve already received tax-free income for those expenses. However if you are self-employed or your employer doesn’t reimburse you then you can evaluate which expenses to include.

 

Cautionary Notes: Ensure You Have Your Documentation

Claiming home office expenses on your tax return can increase your risk of being audited by the IRS. This is because home office expenses are a common target for tax audits. To reduce your audit risk, make sure to claim only the expenses that you’re eligible for and keep accurate records of all your expenses.This includes receipts, invoices, and any other documentation that supports your expenses.

Resources For More Information On IRS Tax Code And Tax Benefits

 

IRS Publications and Forms


IRS Publication 587: Business Use of Your Home:
This publication provides detailed information about the tax benefits for a home office, including how to calculate expenses, what expenses are deductible, and how to claim the deductions on your tax return.
Please note that at the time of publication this document read for 2021 returns, and there have been no updates, before you file please verify.

IRS Form 8829: Expenses for Business Use of Your Home:
This form is used to calculate and claim the expenses for business use of your home on your tax return.

IRS Home Office Deduction FAQs:
The IRS provides a FAQ page that answers common questions about the home office deduction.

 

Information from Tax Professionals

Guide to the home office deduction, including how to calculate expenses, what expenses are deductible, and how to claim the deductions on your tax return.

In conclusion, having a home office can provide many tax benefits, however, there are also limitations you need to be cognizant of. If you’re considering claiming home office expenses on your tax return, it’s a good idea to consult with a tax professional to ensure you’re eligible and to get the most out of your tax benefits.

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