Expenses for Business Use of Your Home

With working environments changing so much since the pandemic, it’s a good idea to have a refresher on legitimate expenses you can deduct for using your home for a business trade.

Let’s Define Home

Per IRS, the term “home” for purposes of this deduction:

• Includes a house, apartment, condominium, mobile home, boat or similar property.
• Also includes structures on the property. These are places like an unattached garage, studio, barn or greenhouse.
• Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.

Methods

There are 2 methods you can use to claim a home deduction: 

The simplified method is a standard deduction of $5 per square foot of home used on a regular basis with a max of 300 square feet. This will allow you a standard deduction of $1,500. No depreciation is allowed and there is no carry over for amounts excess of gross limitation.

The regular method is as a percentage which can be calculated based on the area of the home used for business divided by the total square footage of the home. This will give you the percentage which will be used to calculate the indirect expenses. Direct expenses will be expenses that affect just the office space. 

What Expenses are Deductible?

The expenses that can be taken include:

• Mortgage interest
• Insurance
• Utilities 
• Repairs & maintenance
• Depreciation
• Rent

Deduction

With the regular method, how much you can deduct depends on the percentage which will be counted as indirect expenses. For instance, if you designate 15% of your home to conduct business, the expenses you can claim will be limited to 15% of the expense. If the room you use has a direct expense, such as a flood in just your office designated for home business use, this is considered a direct expense and 100% of the expense can be deducted.

Here’s an example if you own a home: 

Your office is 15% of your home

Mortgage interest $50,000

Insurance $5,000

Utilities $6,000

Repairs & Maintenance on office $2,000

Depreciation $24,000

Expense	Amount	Indirect 15%	Direct	Deduction
Mortgage Interest	$50,000	$7,500		$7,500
Insurance	$5,000	$750		$750
Utilities	$6,000	$900		$900
Repairs & Maintenance	$2,000		$2,000	$2,000
Depreciation	$24,000	$3,600		$3,600
		Total Allowable Deduction		$14,750

Here’s an example for renters:

Your office is 15% of your apartment

Rent $42,000

Rental Insurance $250

Utilities $1,140

Repairs & Maintenance on office $2,000

Expense	Amount	Indirect 15%	Direct	Deduction
Rent	$42,000	$6,300		$6,300
Rental Insurance	$250	$37.50		$37.50
Utilities	$1,140	$171		$171
Repairs & Maintenance	$2,000		$2,000	$2,000
		Total Allowable Deduction		$8,508.50

Gross Income Limitation

One thing to consider is if your deduction cannot exceed gross income from business, so if gross income was $25,000, you can take the full $14,750 deduction. However, if your gross income from business was $10,000, you can only deduct up to $10,000. The good news is that with the regular method, you can carry over $4,750 to the following year as long as the gross income limitation is met.

What Happens When You Sell Your Home?

When you sell your home, the depreciation you took as a home office deduction after May 6, 1997, may have an impact on your capital gains tax. The recapture deductions are taxed at 25% unless your tax bracket is lower than 25%. 

Simple Example:

Using the example above, let’s say you sold your home after taking a home deduction for 3 years and your accumulated depreciation was $10,800 ($3,600 x 3)

$10,800 X .25 = $2,700 taxes owed

Mindful Reminder

If you find Preparing for Tax Season to be especially triggering, starting early may help you. You can begin by breaking up the preparation into chunks and setting a timer to remind you when it’s time to stop. This could be followed by a rewarding activity that relaxes you, makes you smile, or zones you out completely. If you could muster up the courage, take a moment to process your emotions. This doesn’t have to be long. A minute of allowing yourself to be with what’s rising, without judging, and simply observing. Permit yourself to face the discomfort of taxes and you may come to realize it’s not as daunting as you believed.

Attend a Workshop

If you are interested in attending a live webinar on improving your relationship with money, please visit my events.

Related Posts

Preparing for Tax Season	Family Tax Credits	Education Credits
Procrastination & Taxes	Saver’s Credit	It’s IRA Season