Summary: Working from home can certainly be comfy – but can it also save you money on taxes? Short answer…YES! Let’s dive into how the home office tax deduction works, if it applies to you, and how to ultimately save even more of your hard-earned cash!
You know what’s cool about being a high-level entrepreneur?
Of course, besides being able to be your own boss, create your own schedule, and make lots of money. 😉😉
Those are all amazing perks. But one thing that we personally love is being able to work from home! Amen to working around fur babies, taking plenty of snack breaks, and wearing comfy clothes…right??
The benefits don’t stop there, though.
You see, in addition to being totally awesome, working from the comfort of your own home also qualifies you for certain tax benefits! The problem is that not everyone understands how to take full advantage of this money-saving opportunity.
Luckily, you don’t have to be one of those people, because you have us! 🤟❤️
Sharing tax tips for investors and entrepreneurs is a major passion of ours, and today is alllll about the home office tax deduction.
We’re spilling the tea on what the home office tax deduction is, how to know if you qualify, how to calculate your savings, and MORE. Basically, you’ll be prepared to start maximizing your tax deductions while avoiding common, costly errors. 🙌
Juuuust keep in mind that our knowledge is shared from lots and lots of experience, and everyone’s situations are unique. So always take our tax tips to your own tax professional to make sure it’s the right advice for you.
Here’s the agenda for our home office tax-savings guide:
- What is the home office tax deduction, anyways?
- What types of expenses can you deduct for your home business?
- Let’s do this right – how to calculate your tax savings
- Common home office deduction mistakes you DON’T have to make
What is the home office tax deduction, anyways?
You may already know this, but the IRS defines the home office tax deduction as a tax benefit that allows taxpayers to deduct certain expenses – if a portion of their home is used exclusively for conducting business.
We often hear that investors and entrepreneurs get nervous to claim the home office tax deduction, simply because they don’t fully understand who it applies to.
And we get it.
We can’t all just go around deducting whatever we want from our owed taxes – as awesome as that would be. To truly get the best tax benefits, you have to make sure you’re claiming the RIGHT deductions for you and your business.
That brings us to one of the most asked questions on this topic…
How do you know if you qualify for the home office deduction?
Let’s break it down. There are two main things that MUST be true to claim your extra tax savings:
1️⃣ Your work-from-home space must be exclusively used for business activities on a regular basis.
2️⃣ If there are other locations where business activities are performed, your home space must be the principal location.
So, even if you have another place where you handle your business, you can possibly still get in on the home office tax deduction benefit – as long as you do a majority of your work in the home on a regular basis. 👌
What types of expenses can you deduct for your home business?
There are two types of expenses that come up when working from home – direct expenses and indirect expenses.
Direct expenses are things that directly, and only affect your home office – meaning you can deduct the full amount in your taxes.
On the other hand, indirect expenses may affect your entire home, so only a percentage of the expenses can be deducted. For indirect expenses, you need to know the percentage used specifically on your home office. To find it, divide the square footage of your home office by the full square footage of your home.
Some expenses you can expect to deduct – whether directly or indirectly – include utilities, mortgage payments and interest, repairs, maintenance, real estate taxes, and insurance premiums.
There are, however, some limitations to keep in mind when it comes to deductions.
For example, deductions can’t exceed the gross income of your business, and you could be subject to capital gains tax when selling your property in the future. Excess deductions can be carried into future tax years, but just know that the same limitations will apply.
Let’s do this right – how to calculate your tax savings
Now that you know if you qualify for the home office tax deduction and what it means, it’s time to actually calculate your savings. The IRS gives you two ways to calculate how much you should deduct from your home office expenses.
The regular method requires figuring out exactly what percentage of expenses are used for your home office. By expenses, we’re talking about things like mortgage payments, repairs, and utilities – but only the amount used specifically for the office.
Don’t worry. Since 2013 there’s another, simpler way to calculate home office tax deductions.
The simplified option involves less detailed record-keeping and reporting. You just have to multiply a determined rate by the square footage of your home office. The multiplied rate does tend to change from year to year, but it’s currently $5 in 2023.
We don’t know about you, but anytime we’re offered a simplified option, we generally try to take it. 😂😂
In this case, it really depends on what makes the most economical sense to you. If you go with the regular method, you may get more accurate and precise deductions, meaning you could be saving more money.
Plus, the simplified option puts a limit on your home office space – at 300 square feet. If you have a larger home office, you may want to consider the regular method.
But listen. As an entrepreneur, you clearly value your time, as do we. So, the simplified option could be your better choice for saving time and energy in your tax deduction calculations. The cool thing is, it’s totally up to you!
Common home office deduction mistakes you DON’T have to make
Let’s play a little game of what not to do when deducting. Many people make these common mistakes when it comes to home office tax deductions. Take note, because we don’t want aaaanything coming between you and your tax savings. 🤩🤩
Mixing business with personal – just don’t do it.
Sometimes people blur the lines between business and personal expenses. A little extra cash for that new paint job that covered both your office and bedroom is simply not worth being audited over.
Trust us.
Failing to keep good records could mean a failed tax deduction.
Don’t forget the receipts! Knowing what direct and indirect expenses you’ve accumulated throughout the year will make your life easier when it’s time to apply for your home office tax deduction. Having evidence is always important when asking for any type of tax deduction.
How to apply for the home office tax deduction ⏬
Okay, here we are. If you’ve decided that you qualify for the home office tax deduction – awesome! We’re excited for you to start saving even more money in taxes while running your business from home. We’ll even point you in the right direction to get started.
Step 1: Be sure to chat with your tax professional about what you’ve learned here, and make sure this is the right move for you and your business.
Step 2: Fill out form 8829 to find out what your deductible expenses are.
Step 3: Report your deductions by using Schedule C.
Step 4: Attach forms to your individual income tax return and BAM…you’re on your way to saving more of your hard-earned money!
We hope this has been helpful for you in clearing up some confusion around the home office deduction. We just want you to get the most out of your tax savings, so you can keep pursuing your dreams and growing real, sustainable wealth. ✨
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