Maybe… only if the following conditions apply:

  • You have dedicated space that is solely used for business and it has been conditioned to not be able to be used for personal purposes
  • It is clearly designated and not part of another room (for example a desk in a bed room or the dining room table would NOT work) so I would prefer this to be a separate room all together
  • You can prove (with timestamped pictures) that this space has been designated for this use all year
  • It is necessary for you to have this space in order to generate income (you would otherwise NOT generate any income without this home office)
  • You do not gave an alternate space for use as office already claimed as an expense as well in your business

Then, the answer is YES, you can deduct your home office.  The next question is “How Much?” so there are two methods for calculating this:

 

Method 1. The Safe Harbor Method

You calculate the square footage of the space and multiply it by $5, the total is the ANNUAL home office deduction.  For example, if you have a Home Office that is 150 sq. feet, the total deduction for the year would be $750.  This is limited to 300 sq. feet.

 

 

Method 2. Proportionate Cost Allocation (Renters)

You add up all your costs, such as: Rent, Renter’s Insurance, Utilities, Internet, etc. for the year and multiply that amount times the square footage allocation.

Square Footage Allocation = Home Office’s Sq. Footage Divided by Total Square Footage

Example: Home Office is 300 sq. feet and the whole apartment is 3000 Sq. Feet = 10% Allocation
Total Costs of Rent and Utilities = $25,000 for the year x 10% Allocation = $2,500 Home Office Deduction

 

 

Method 2. Proportionate Cost Allocation (Home Owners)

You add up all your costs, such as: Home Owner’s Insurance, Utilities, Internet, Mortgage Interest, plus the “Depreciation” of your home at 27.5 years based on the value of the property (property only, land value excluded) for the year and multiply that times the square footage allocation.

Square Footage Allocation = Home Office’s Sq. Footage Divided by Total Square Footage

Example: Home Office is 300 sq. feet and the whole apartment is 3000 Sq. Feet = 10% Allocation
Total Homeowner’s Insurance, Property Taxes, Utilities, and Depreciation of the home = $30,000 for the year x 10% Allocation = $3,000 Home Office Deduction

 

Note: with this method, you now have to reduce the expenses you can take on your schedule A by 10%.  Also, when you sell the property, there will some income tax to pay that represents the depreciation recapture of the property if the home is sold above the cost (at a gain)

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