The Home Office Deduction: Which Option Is Best For Your Business?

If you are a self-employed professional who works from home either part of the time or every single day, you know the benefits of this convenience. Your commute is only a few footsteps into the next room. All the coffee you need to stay awake is right in the kitchen. And, your lovable poodle is always at your side.

In addition to these nice perks, you may also be eligible for tax savings through the home office deduction. Consider the two write-off methods you can choose from to determine the best option for your small business.

Percentage Option

The traditional home office deduction involves claiming a percentage of your residence-related bills as a write off for business use of your home. You must designate a specific and exclusive room or area within your house, apartment, or mobile home where you conduct regular business activities. You can then claim a percentage of relevant bills as a write-off.

For example, if 30% of your home expenses are related to doing business in a home office, you can deduct 30% of your relevant bills as a business expense on your tax return.

Eligible expenses you can include in this deduction option are:

  • Mortgage interest
  • Rent
  • Insurance
  • Utilities
  • Repairs
  • Depreciation

Keep in mind that if you take the percentage option for the home office deduction, you must carefully document all relevant expenses and prove to the IRS that the amount you write off is legitimately tied to self-employment work within your residence. This means you should include proper documentation of your expenses when filing your return.

Flat-Rate Option

In 2013, the IRS introduced a flat-rate deduction for home office expenses. This write-off is designed to simplify the process of claiming home office expenses and involves much less documentation and recordkeeping than the percentage option.

When using this method, you can deduct $5 per square foot for a maximum deduction of $1,500 for up to 300 square feet of space for home office activities.

So, let’s say you are a marketing consultant who communicates with clients by phone and Skype. You work out of your home in a spare bedroom, and your workspace comprises 200 square feet of this room. Therefore, if you multiply 200 square feet by $5 per square foot, your flat-rate home office deduction for a given tax year would be $1,000.

As with the percentage option, remember that you should still designate a specific area of your residence for business use. Document all relevant business expenses and keep solid records.

Choosing The Best Deduction Option

If you are eligible to write off home office expenditures, it’s important to determine which option is best for your specific situation. If you have time for ample recordkeeping and don’t mind the process, you may opt for the percentage method.

But if you’re looking to save time and minimize potential headaches, the flat-rate method may be best for you.

It’s also worth noting that your location may play a big role in choosing the most appropriate method. Let’s say the real estate in a Chicago neighborhood is valued at $200 per square foot. However, in rural Georgia, it only costs $50 per square foot of real estate.

Therefore, the flat-rate method would significantly benefit residents of a rural town in Georgia far more than those in Chicago. In turn, the percentage method would be more applicable to those in Chicago where there is a higher cost of living.

By Greg Lindberg, Editor at 1-800Accountant. 1-800Accountant is the nation’s leading tax and accounting firm that specializes in providing cloud-based accounting services for small business owners across all industries and individuals.

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