If you work from home, you may be eligible for tax deductions on part of the rent or mortgage payments you make, but you may be afraid this puts you at risk of tax audit. And, rightly so. Calculating your home office deduction properly can minimize your taxes and keep you out of risk.
The IRS provides two methods with which you can calculate your deduction: the simplified method and the regular method.
Assuming your home office space is regularly and exclusively used for your business operations, you can choose the method that will give you the biggest deduction. Let’s take a look at these methods to see what kind of benefit they can provide the business owner.
The simplified method is based on the square footage of the office space in your home. To determine your deduction, simply multiply your home office square footage by $5. For example, if your allowable home office square footage is 60 sq. feet, you would multiply that by 5 to arrive at a deduction total of $300.
This method is as easy as it gets and makes calculating your home office deduction a breeze.
The regular method is based on adding up expenses you’ve paid to maintain that space, such as mortgage payments, rent, utilities and internet access. The percentage of your home you regularly and exclusively use for your home office will be another variable. To use this method, you will have to do some math, but the total deduction may be higher than it would be using the simplified method.
To maximize your home office write-off, you should run your numbers through both methods. Determine which method will maximize your home office deduction and use accordingly.
One other option, if you rent your home, is to enter into two separate lease agreements with your landlord. One lease with you personally for part of your rent, and the other lease with your business, for the part of your rent that is specifically for the space that is used for your business. In that case, you would not take a home office deduction, but instead categorize your business rent expense as office rent on the expenses part of your tax return.
Not sure which is best? Contact us to discuss options for how we can support you in maximizing your tax deductions with advice from a tax advisor you can trust, with our support.
It’s important consider these opportunities carefully when running a business out of your home. If you want to ensure you are getting the most out of your home-based business, start by sitting down with a lawyer, like us. We can help you maximize the benefits and minimize the liabilities of operating your business out of your home and ensure your business operates at its peak in any location.
This article is a service of Bridge Law LLP. We are an award-winning law firm that specializes in business and estate planning for clients like you. The goal for every family is to stay educated on all topics like this, avoid probate, avoid estate taxes, and build a legacy for you and your loved ones. What sets our firm apart is that we build lasting, lifelong relationships with our clients. They rely on us to keep them updated, provide sound legal counsel, and be there for them immediately if any problems should ever arise. The best part is we don’t charge hourly fees to our families, so you never have to worry about speaking to us. If you’re ready to keep your family out of Court, contact us today to schedule an initial consultation or visit our website at www.bridgelawllp.com.