When determining your deductible business expenses for home office use, the IRS lets you choose between simplified and actual expenses methods. Rather than having to calculate all your indirect expenses and direct expenses, the simplified method lets you simply deduct a flat rate per square foot and minimizes recordkeeping hassles. Here's what you should know about qualifying for, calculating and reporting the simplified home office deduction on your tax return.
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Exploring Home Office Deduction Requirements
Before doing any calculations, make sure you're eligible for the home office deduction. First, you need to be self-employed and exclusively and regularly use the home office space as your principal place of business. You'll need to use the space for management or administrative activities as well as not have an office outside the home where you perform these business activities.
However, the IRS has an exception if you run a licensed daycare since you can claim the deduction for the relevant shared business/personal space. In addition, you can claim inventory space at your house as long as you don't have space elsewhere.
Unlike when using the regular method, taxpayers don't have to enter individual expenses and do calculations on IRS Form 8829 with the simplified method.
With the increase in remote work during the pandemic, many people use their home office exclusively for business use but are regular employees for a company. Currently, the IRS won't let you take the home office tax deduction if you're an employee, even if your boss requires this and doesn't reimburse you for expenses. This rule is in place through 2025 at least, but keep an eye on any possible changes that may arise.
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Calculating With the Simplified Method
The simplified method offers a deduction of $5 for up to 300 square feet of home office space, so you can deduct $1,500 max. This means that if you have a larger home office, you can just deduct for the maximum allowable square footage. In addition, note that the IRS requires that the deduction isn't more than your business's gross income and doesn't allow any carrying over.
You'll first need to measure your small business space's length and width and multiply those figures to get the total square footage. If you have a dedicated room, you can use the room's dimensions. However, if your home office is just part of a room, you'll need to measure only the portion exclusively used for business. For example, a 10-foot-by-10-foot space would equal 100 square feet and a maximum $500 deduction.
Once you know the square footage, you'll need to determine the time period you used the home office space during the tax year. If you used it the entire year, you can simply take the maximum deduction. But if you used it for only nine months, you'd take 75 percent of your maximum deduction. If you run a daycare or use inventory space, check IRS Publication 535 since special rules for calculations based on usage apply.
Consider also: Guide to Home Office Deductions
Reporting on Your Tax Return
Unlike when using the regular method, taxpayers don't have to enter individual expenses and do calculations on IRS Form 8829 with the simplified method. You can simply enter your home office deduction amount on line 30 of your Schedule C, where you also claim other relevant business deductions. You'll get your final business income from line 31 and use this number to complete tax forms such as Schedule 1, Schedule SE and Form 1040 as usual.
If you've decided to take homeowners' itemized deductions on Schedule A for things such as mortgage interest and property taxes, you can still do so. However, be aware the IRS doesn't allow a home depreciation deduction with the simplified method. Consider speaking with a tax professional to determine which itemized deductions work for your situation.
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- IRS: FAQs - Simplified Method for Home Office Deduction
- IRS: Simplified Option for Home Office Deduction
- IRS: Deducting Business Expenses
- IRS: About Form 8829, Expenses for Business Use of Your Home
- IRS: About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)
- IRS: 2020 Instructions for Form 8829
- IRS: Publication 535 (2020), Business Expenses
- IRS: About Schedule A (Form 1040), Itemized Deductions