Home Office Deductions
You’re eligible to claim deductions related to their home office if you’re self-employed and working from home, even if it’s only part-time. Unfortunately, If you are an employee who is working from home, you aren’t eligible to deduct any expenses. Although you cant claim tax deductions many employers are currently helping cover the cost of working at home for their employees. If your employer currently isn’t covering these costs, I would recommend reaching out to your HR department or manager to see if they would be able to help cover the costs or reimburse you for any related expenses.
What is a Home Office?
You are eligible to deduct qualified home office expenses if you are self-employed and work from home. you must use an area regularly and exclusively for your self-employed business for an area in your home to be considered a home office. Also, the area must be your primary place of business or a separate structure used in connection to your business.
What expenses can you deduct?
There are two ways to determine the deductions for a home office. One is using actual expenses and the other is the simplified method. Actual expenses can be split into two categories, direct and indirect expenses. Direct expenses are expenses that apply directly to your home office area or your business. You can deduct 100% of any direct expenses. Indirect expenses are expenses that aren’t exclusive to your home office. These could include Utilities, rent, Insurance, real estate taxes, security systems, and other similar expenses. Then, divide the square footage of your home office by the square footage of your entire home. Use this to determine the percentage of these expenses you can deduct. Multiply this percentage by your indirect expenses to determine the deductible amount of those expenses.
- You shouldn’t include any unrelated expenses that aren’t for the entire home or directly related to the home office or your business.
The simplified method is the other way to determine your deductible amount. This method allows you to deduct a flat rate per square foot. For 2022 you can deduct $5 per square foot up to 300 Square feet.
Regardless of which method you choose, the deductions will decrease your income, thus reducing your tax liability.
Can you depreciate assets?
Yes, you can and should depreciate assets. Especially your home because you must recapture depreciation when you sell your home. Even if you didn’t depreciate it while in use, this is still required. To figure out how much you should depreciate you must know the adjusted basis, the cost of improvements, and lastly the percentage of your home used for personal use.
- The adjusted basis is the cost of your home plus any permanent improvements minus any casualty losses and depreciation deducted in previous years.
- Permanent improvements to the property are defined as adding value to the property, giving it a new or different use, or adding to its life.
Next, multiply the percentage of your home that you use by the adjusted basis of your home. These values shouldn’t include the value of the land. This is the amount you can depreciate. You should use the modified accelerated cost recovery system or MARCS to depreciate your home office which uses a 39-year straight-line depreciation schedule.
Some exceptions and limitations can be challenging to understand without professional help. I would recommend consulting a tax professional to make sure you are making the right decisions.