As a sole proprietor of a small business, there are two options you can choose from when it comes to deducting home office expenses.
The simplified method is calculated at $5 per square foot of office space, capped at $1,500. This method requires minimal recordkeeping, whereas the regular deduction method factors in all of your actual expenses toward the operation of your home office.
There are limits on eligibility for the home office deduction—it can only be taken if the home office is exclusively and regularly used as a primary place of business.
- Exclusive: In order to qualify for the deduction, the home office has to be exclusive to your business. You can’t just put a desk into a guest room and call it a home office. It needs to be a dedicated space out of which you operate your business.
- Regular: You need to use your home office regularly and consistently for business purposes. If it’s a home office you use every once in a while, you can’t deduct it.
- Primary Place of Business: Your home office must be the place from which you run your business. If you have a corporate office as an employee of a company and also have a space to work from home, that isn’t an eligible use of a home office. It has to be for your own business that you operate.
Which Method Should I Use?
As with most tax questions, the answer is that it depends on your particular tax situation. Most entrepreneurs can use the simplified deduction without concern, but you may want to opt for the more involved method in the event your expenses total more than $1,500 (the cap for the simplified method) or your office is larger than 500 square feet.
Using the regular method includes your direct and indirect expenses. Direct expenses include things like a dedicated phone line for your business or upgrades to your home office like updating the floors or replacing light fixtures. Indirect expenses include a proportional percentage of your overall home costs like utilities, internet, mortgage interest, etc. If your home office takes up 25% of your home’s square footage, you can claim 25% of these expenses in your home office deduction.
This method requires a lot more recordkeeping, since you’ll need to keep copies of all invoices related to the home all year in order to take this percentage. This is why we recommend choosing the simplified home office deduction as long as it makes sense for your situation!
Tree City Tax Service can file business tax returns for sole proprietors, with or without an LLC. If you operate a small business, we’d be happy to help you strategize your home office deduction and support you with year-round tax advising. Book a complimentary consultation today.