14 Home Office Deductions For The Small Business Owner To Consider
Owning a small business is exciting, fulfilling, and quite a wild adventure. From deciding how you structure your business to how you handle employee onboarding, there’s a lot to consider. One of those considerations: taxes. Filing your taxes may not be a business task you particularly enjoy, but it’s important nonetheless.
Of course, it’s critical to file your taxes correctly so you remain in the good graces of the IRS. But perhaps more appealingly, filing your taxes can even help you maximize your profits.
If you haven’t started strategizing for your 2023 taxes, now is the time to do so! In this article, I’ll help you discover specific deductions for home office expenses so you can get the most deductions possible.
What You Need To Know About Home Office Deductions
First things first: A home office deduction only qualifies if the space is solely dedicated to working. Fortunately, the space does not have to be a separate home office with a door, but it does need to be a space that is used regularly and exclusively for conducting business.
Home office deductions are available for both homeowners and renters. “Home” can refer to a single-family home, apartment, condominium, mobile home, boat, or other similar properties. Additionally, detached structures such as a studio, unattached garage, or barn may qualify for home office deductions. However, the space cannot be exclusively used as a hotel or similar business—like an Airbnb room for rent.
You can claim home office deductions even if you sometimes hold meetings with clients or customers outside of your home. Employees cannot claim home office deductions—only business owners, independent contractors, freelancers, and sole proprietors can deduct the expenses of working from home.
Keep in mind that the home office deduction cannot exceed the income from which the deductions are being taken. And if you didn’t use your home office for the entire year, then you need to figure out what percentage of the year you did use it and factor that into your calculations.
Standard (Or Regular) Deduction Versus Simplified Option
There are two ways to determine your home office deduction: the standard deduction and the simplified option. Both options require that your space meets the specifications above, but they differ in how you choose to calculate the actual percentage or dollar amount.
Standard (or regular) deduction: Based on the percentage of your home used for business, you must track the dollar amount of each expense. You may also deduct depreciation for the portion of your home used for business purposes, but you’ll have to recapture depreciation at the sale of your property.
It’s important to keep really good records of all your expenses. There are great apps for small businesses to help you track your expenses and prepare for tax season.
The simplified option: Based on multiplying $5 x the amount of allowable square footage of a home used for business (it cannot exceed 300 square feet). This option does not include depreciation for the home office. The maximum deduction for this option is $1,500 (300 square feet x $5).
The simplified option might be better for those who have a smaller business whose home office space takes up a smaller portion of the property. But it’s important to calculate both options each year to determine which option is best for you.
14 Home Office Deductions For The Small Business Owner
On the IRS Form 8829, there are direct and indirect expenses. Direct expenses are the actual cost of repairs, maintenance, and depreciation of items in your home office. Indirect expenses are the costs related to maintaining the home office such as a portion of your property’s utilities.
Direct Expenses
These expenses are directly related to your home office space and can be deducted at 100%.
Home Office Maintenance and Repairs: This includes maintenance and repairs done only in your home office space, such as painting your office.
Home Office Furniture: A new desk or chair could be included here.
Home Office Equipment: This could include printers, filing cabinets, office supplies, and more.
Indirect Expenses
These expenses are broken down by the percentage of your home office in relation to your entire property. For example, if you have a 1,500-square-foot apartment and your home office space is 300 square feet, the calculation would look like this:
300 / 1,500 = 0.2
You can claim up to 20% of the below expenses for your home office deduction, based on the ratio of your office size to your home size.
Mortgage or Rent Payments
Homeowners or Renter’s Insurance
Mortgage Insurance & Property Taxes (you may claim mortgage insurance and property taxes on your personal deduction or split the costs between your personal deduction and home office deduction
Homeowner’s Association (HOA) Fees
Property Depreciation
Utilities: Electricity, gas, trash, water, etc.
Internet
Cell Phone or Landline. Unless your phone is used exclusively for work, you’ll need to use the percentage of work used in your calculation.
Housekeeping
Security System
Whole House Maintenance and Repairs: Such as roof and flooring replacements.
Home Office Deduction Examples
Below are two examples of how two small business owners, Sally and Ronda, would calculate their 2022 home office deductions.
Sally’s Simplified Option
Sally was a small business owner from July to December 2022 and wants to use the simplified option for her taxes. Sally’s condo is 1,000 square feet and her home office space is 200 square feet.
Using the simplified method, Sally’s calculation would look like this:
200 (home office square footage) x $5 (IRS’ simplified option) x 0.5 (percentage of the year she used her home office) = $500
Ronda's Regular Option
Ronda was a small business owner for the entirety of 2022 and wants to use the regular option for her taxes. Ronda’s house is 3,000 square feet and her home office space is 300 square feet. Her expenses were as follows:
Direct Expenses:
New desk: $400
Office painting: $300
Indirect Expenses:
Mortgage: $2,500/month or $30,000/year
Utilities: $500/month or $6,000/year
Phone Bill: $100/month or $600/year (she used her cell phone 50% for business and 50% for personal use)
Security System: $40/month or $480/year
Using the IRS’ regular method, Ronda’s calculation would look like this:
Total Direct Expenses = $700
Total Indirect Expenses [$37,080 x 0.1 (the percentage of her home office space)] = $3,708
$700 + $3.708 = $4,408
Although the calculations for the regular method may seem tedious, they might be worth it depending on the size of your home office and the expenses you’ve incurred for the year.
Conquer Your 2023 Taxes With Financial Fitness Coaching
Tax deductions for small business owners are an excellent way to maximize the profitability of your business. While filing taxes and calculating deductions may feel overwhelming, we’re here to help. The coaches at Financial Fitness can help you feel empowered and educated about the tax strategies available to you as a business owner and make sure that you’re in the know on what to discuss with your tax planner and preparer.
There are truly wonderful benefits to being a small business owner and we want to help you see all the possibilities, including home office deductions. To see how we can help you and your business, simply schedule a free 20-minute Discovery Call on my calendar.