A: The home office deduction standards are pretty strict. According to tax law, in order to qualify for a deduction your home office has to be more than just a room at home where you sometimes work. If you are self-employed, your home office must be used both regularly and exclusively for work. It must be your business’ principal place of business, used by patients, clients or customers in the normal course of business, or else be a separate structure. Even something as innocent as having your relatives camp out in your home office over the holidays could disqualify your claim.
You still qualify for the deduction if you’re self-employed, but starting in 2018 and through 2025, under the new Tax Cuts and Jobs Act, employees are no longer able to claim a home office deduction—these claims fell under the category of unreimbursed employee business expenses, which are no longer tax-deductible.
Still, for those who qualify, calculating home office deductions is easier now than it used to be. Until the IRS simplified the process a few years ago, you had to factor in a lot of complicated figures, such as the percentage of square footage your office takes up in your house, and depreciation of your home's purchase price. You can still apply that method if you want to, but now you have the option of using a simplified deduction of $5 per square foot dedicated to home office use, with a maximum of 300 square feet.
For those who qualify, calculating home office deductions is easier now than it used to be.
In a few situations, it might still make sense to use the more complex deduction—for example, if your home office is significantly larger than 300 square feet, or if your office takes up a large portion of the house. You may also be able to factor in certain costs—some kinds of insurance, utility bills, renovations—that can't be separately accounted for under the simplified method. Finally, while neither method allows your deduction to exceed your home-based business’ income for that year, under the old method you can still carry excess deductions over future tax years as long as you use the old method. In many cases, the simplified deduction is the easiest option. If you use it this year, you're not required to use that option next year; it's totally fine to switch on a year-to-year basis, depending on which is more tax efficient.
I'd suggest calculating both figures and comparing them to see which will save you more. Just make sure you're not leaving a legitimate deduction on the table. And whatever you decide, be sure you work with a tax professional as well as your financial advisor.
3 Questions to Ask Your Advisor
- What are some of the major costs—and savings—involved in running a business from home?
- Could having a home-based business change the way I need to organize my financial life?
- Should I consider business insurance for my home-based company?
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