The home office deduction is one of the most common tax benefits available for those who run small businesses in their homes. Qualified taxpayers may deduct their home office expenses when filing taxes.

The benefit is based on many rules to ensure the taxpayer is eligible for the discount, like the business percentage of the taxpayer’s property and other things. Analyzing the methods and trying to get the tax break may look hard, but once you understand the process, it gets much simpler.

The deductible home office expenses are specific items that the taxpayer can choose as a benefit deduction. There are six main items on the list, and the deductions on them depend directly on the person who is claiming the deduction and their business characteristics. These include: 

• Deductible Mortgage Interest
• Insurance
• Utilities
• Rent
• Real Estate Taxes
• Depreciation
• Maintenance

The first requirement for having a home office deduction is that part of your home is destined for your business only. If you want to be eligible for the business deduction, you may certify that there is a room used for the home office exclusively.

The title is already self-explanatory. If you want the tax benefits, your place must be the HQ of your business, the primary place of running.

The concept of what places can be defined as a home is provided by the IRS. If your workspace fits in any of these categories, this means that your workspace may be eligible for the tax deduction.

• It has structures in it, like a garage or a gazebo, for example
• Does not have places used exclusively as hotels, motel, or anything like that.
• Presents a mobile home, condominium, house, boat, or any similar property structure.

There are two exclusive-use test areas that are not considered applicable for the tax deduction. If this is your case, be aware that you may not be eligible for receiving the tax break.

Although there are exceptions for some of the cases. Be sure to check if your business fits in the descriptions.

If you run a daycare or any kind of care facility like a nursing home for older adults, you are not eligible for the deduction benefits. Since you can still use the same spaces at your house for personal use and also claim the deduction, this kind of activity is not accepted for the benefit.

Another activity that does not attend to the requirements to be considered home office deductive is product storage. Since you can have a business at another place and still use your basement as storage for some of the units to claim the deduction, this is not allowed.

Although there is an exception to this rule. If you don’t have any other fixed location for storing these products and you store them at your home, which is considered the principal place of your business, then it’s eligible for the deduction.

Despite being a boring and exhaustive activity, there are two ways that you can calculate your total deductions. You can use the simplified home office deduction method or the regular one, it’s up to you to decide which one is better for you.

This method is more indicated for those with a lower usage percentage of the total space and also to those with small homes. The simplified method requires minimal documentation and can be easily done, excluding the need of record-keeping and other things that make the process more complicated and expensive.

In the simplified method of calculating the home office deduction, you multiply by $5 the area used by your business, with a max deduction of $1,500. If your area is bigger than that, cap the measure to 300 square feet or use a regular method.

For this home office deduction method of calculation, we use the direct expenses instead of the business use percentage of space. Those expenses include mortgage interest, real estate taxes, insurance and many other things.

This process is normally more expensive, especially when thinking of hiring someone to do that, which is a normal action. With this in mind, this process is more indicated to those with bigger home office businesses and companies with more home expenses and square foot usage.

If your principal place of business has more than 300 square feet, then you have to use this method in order to get the most deduction possible out of your expenses. Be sure to choose the right method for your home office and business percentage.

The worksheet is basically a document to help you keep track of the deducted expenses you can get and also show you a simplified home office deduction resume. Here the user can put all the information he needs to calculate things like the allowable deduction and deduct expenses, for example.

The main objective of this document is to aid the taxpayer by reuniting information like actual expenses, deduction limits, and many other things. Since this is an important document and has a huge impact on conducting business expenses, there are some important tips that you should follow when doing it.

Another major topic when calculating the home office expenses and building the worksheet is the deduction limit. This is defined by the gross income of your small business and its relation with your total expenses.

Your total expenses can’t be bigger than your income. If this happens, you won't be able to deduct all expenses, just some selected ones. On the other hand, if your business income is bigger than your total expenses, then you can deduct all of them.

Another vital item from the home office deduction worksheet is the allowable deduction. They are based on your direct and indirect expenses, so it’s good to know the difference between them.

Even though the usage of your principal place of business has a direct impact on your indirect expenses, you can still reduce the direct expense by up to 100%. With this in mind, it’s pretty important to add this data to your worksheet to clearly understand your expenses and deductions.

Want to use a ready template instead of making your own to save time?

No problem. There are lots of ready-to-use templates that you can edit to fit your needs. Be sure to choose one that fills every need and lets you customize the sections of the sheet. Here are some templates for your home office business:

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