Simple 2023 Home Office Deduction Guidelines

 

Tax season is just around the corner, so it’s time for small business owners to consider self-employment tax deductions! Maximizing these tax write-offs is vital to to minimizing your taxable income. And if you run a home-based business, the home office deduction could be one of the most valuable.

The IRS offers two ways to claim the home office deduction: the regular method (i.e., Itemized) or the simplified option. Stick with us to find out if you qualify, what you can include, and how each works below.

Who Qualifies for the Home Office Deduction?

W-2 employees who work remotely do not qualify for the home office deduction. However, if you filled out a Form 1099 as a contractor or self-employed worker, you’re most likely eligible. Keep in mind you must have made a profit in the tax year for which you’re claiming this deduction.

So, how do you know if you qualify? It mainly concerns your workspace, which must meet IRS requirements. This means you must use the space exclusively and regularly for work, and it must be your primary place of business. If you use an extra room, you can only take a home office deduction for that extra room. Even if you conduct business outside your home but regularly perform certain business activities in your home, you may still qualify.

Let’s say you own a construction company and spend much of your day at worksites. You might conduct accounting, marketing, customer outreach, and other administrative duties from your home office, in which case that space would be deductible.

The home office deduction applies to both homeowners and renters. That can include a house, apartment, condo, mobile home, and even a boat! An eligible home office can also be a separate structure on your property, such as a detached garage, studio, barn, or greenhouse that is exclusively and regularly used for business. 

The IRS states that property used as a hotel, motel, inn, or similar does not qualify.

How Does the Home Office Deduction Work?

There are two methods for claiming the home office tax deduction. The regular method is more complicated and involves very detailed recordkeeping, but it could help you get a higher deduction. On the other hand, the simplified option is ideal for those who don’t have such meticulous records or enough deductions.

Remember this as you gather your documents and prepare your 2023 small business taxes.

Regular Method

The “regular” or itemized home office deduction method allows you to write off expenses such as:

  • Part of your mortgage and mortgage interest

  • Property taxes

  • Property maintenance and repairs

  • Lawncare

  • Utilities

  • Homeowner’s or renter's insurance

If you’re an avid record-keeper with a significant number of deductible expenses, this method is best for helping you maximize the deduction. 

Next, you may be wondering, How do I calculate the home office tax deduction? Based on the square footage of your home, calculate the percentage you use for business according to the IRS’s definition above. This is your deductible portion, which you would calculate and report on Form 8829.

For example, if you use 10% of your home for your business, you can roll 10% of those eligible home expenses into that deduction. So, if you have $30,000 in expenses, that means a $3,000 deduction. While the IRS states many detailed requirements, generally, these expenses must be related to the portion of your home used for business. You’ll need documentation for these expenses in case you are ever audited.

Simplified Option

Maybe your books aren’t as detailed, or you have minimal expenses. In that case, the simplified option might be best for you. It allows you a standard deduction of $5 per square foot of your home used for business, with a max of 300 square feet or $1,500.

If you opt for the simplified option, you would take the home office deduction and then itemize any other home-related deductions on Schedule A of your individual tax return.

Bonus Tips to Make the Most of Your Home Office

As we approach tax season and you prepare to file your small business taxes, the home office deduction is a valuable write-off. You can choose either option, but once you select one for a given tax year, you can’t change it later for that same year. That’s why it’s often best to calculate it both ways before filing to assess which will get you a higher deduction.

Here are a few extra tips for getting the most from your home office deduction:

  • Keep records of all home expenses. Remember, you can deduct a percentage of most of them! Keep your receipts and enter everything into a spreadsheet or your accounting system weekly or monthly. This will ensure you stay organized and don’t miss any deductible expenses.

  • Define your home office space. Certain areas of your home probably won’t qualify for the home office deduction if they’re commonly used for other purposes (e.g., your kitchen table, sofa, or bedroom). So, create a designated area to use specifically for work. It doesn’t have to be an entire room—whether part of a room, a corner of your studio apartment, or a converted closet, it’s considered a home office if used exclusively for business.

  • Use the optimal space. Perhaps you’re currently using a spare room as a gaming or craft room and working from a smaller room or area. Would your business benefit from having more space? If so, consider moving your office to the spare room so it has a larger footprint, and you can increase your home office deduction.

Are your accounting and tax needs growing more complex and time-consuming? Then it may be time to work with a partner to ensure you maximize your deductions and adhere to IRS rules. JLS Accounting will happily guide you on the best financial decisions for your business. Book an intro call today to get started!

 
Small Business Taxes, TaxJaime Lynn Soares