Calculating the Home Office Deduction for Your Business Taxes

As an entrepreneur if you work from home you get a break on your taxes. The IRS offers two ways to claim the home office deduction on your annual income tax return — the simplified method, and the regular expenses method. 

You can pick one or the other, but not both!

Tax Option 1: Simplified Home Office Method

You take the size of your office and multiply it by $5 sq ft.

So, in my last example if your office width is 10ft and the length is 15ft that equals 150 sq ft. You then take 150 sq ft by $5 per sq ft and that equals 750. The home office tax deduction would be $750 for a 150 sq ft office. 

One important rule if you use the Simplified Method is the MAX tax deduction you can take is $1500.  

So that means if your home office is larger than 300 sq ft it doesn’t matter the calculation. You are capped at $1500 for the home office tax deduction.

Tax Option 2: The Percentage of Home Method

This used to be the only method allowed and it was so burdensome for taxpayers that the IRS came up with the Simplified Method which we previously discussed. With the Regular Method you take a portion of all home-related expenses. 

First, you need to add up all your home related expenses which includes the following:

  1. Rent (this does not include mortgage payment unfortunately but mortgage interest) per IRS guidelines
  2. Utilities – electric, water, security system, internet
  3. Home insurance
  4. Repairs (this does not include improvements)

The second number you need for the Regular Method is what percent of your home is the home office. This is where those sq footage numbers are needed. If you have a 150 square foot office and your house is 2000 square foot you take 150 square foot / 2000 square foot to get 7.5% of your house is taken up by your home office. 

Multiply your total home related expenses by this percentage to find out how much you can deduct for your home office using the regular method. So let’s assume your total home related expenses were $3,000 multiplied by 7.5% would create a $225 home office deduction using the regular method. 

Using the same home office scenario with the simplified method which is $5 per sf. Our 150 sf home office multiplied by $5 per sf would come to a $750 deduction. So for our example the simplified method results in the higher deduction.

When you sit down to donor takes, assemble the information you need and take the time to calculate both options. Compare them and take the most beneficial as your deduction. Keep in mind that this can change from year to year and you can review the IRS guidance on rules calculating the deduction on the IRS web site HERE.