If you have a home office or a space in your home dedicated to conducting business, you may qualify for a home office deduction. However, there are some requirements that must be met:
- The business part of your home must be used regularly and exclusively for business purposes.
- This space must be your principal place of business or a place where you meet regularly with clients/customers.
If you have met the above requirements, you have two options to choose from on how you would like to take the deduction.
You can use the “simplified method,” which is a deduction of $5.00 per square foot of the space you use for business. This method is relatively new and has made it easier to take the deduction but also may not give you the biggest tax break.
- This option is deductible up to 300 square feet.
- There is a maximum deduction of $1,500.
- No depreciation recapture when you sell your home.
The other option is “the regular method” of deducting a percentage of your actual expenses based on the portion of your home you use for business.
- If you rent your home, part of the rent you paid may qualify, or if you own your home, you may deduct part of the mortgage interest, taxes, and utilities.
- The deduction is limited and cannot exceed the gross income generated.
- Depreciation on your home office or work space will be subject to capital-gains tax or depreciation recapture if you eventually sell your home.
- If you are an employee there may be other requirements that have to be met.
Good recordkeeping is necessary and will help your tax preparer support the items on your return. Your preparer can also discuss tax implications and help you decide which option is most beneficial to your tax situation.