In my experience, this is one of the most overlooked deductions available on the 1040 (individual income tax return): the home office deduction. The home office deduction was once available as a deduction on the Schedule A (as an itemized deduction) or the Schedule C (as a self-employed business deduction). Starting in the tax year 2018, the Tax Cuts and Jobs Act eliminated the home office deduction from the Schedule A, so through the tax year 2025 (unless tax reform occurs) this deduction is only available on the Schedule C. For those with 1099 income (self-employed income), the home office deduction still presents significant tax savings – yet when clients self-prepare their tax return this deduction is often overlooked.
Do I qualify for the home office deduction to write-off some of my self-employed income?
The basic test to determine if you qualify for the home office deduction is did you use your home office exclusively and regularly as your principal place of business during the tax year? If yes, then you can take advantage of the home office deduction. If not, then you likely do not qualify for the deduction. However, if you exclusively used the space in your home as your home office and regularly met with patients, clients or customers in your home office then you may take advantage of the deduction.
Regular method vs. the simplified method
If you qualify to take the home office deduction, then there are two methods for calculating your deduction: the regular method and the simplified method. Both methods have their own advantages and disadvantages. The simplified deduction is just that, simple. Taxpayers typically take advantage of this method when they don’t want to go through the headache of gathering all necessary invoices for the year to calculate the regular method. The simplified method only requires the taxpayer to come of with one variable in the equation: the square footage of the space used as the home office. With the simplified method, the taxpayer is eligible for a $5 deduction for each square foot of the home office, up to a maximum of 300 square feet. The simplified method is easy to calculate, but as you can see this method caps your potential deduction at $1,500 – taxpayers may be leaving some tax savings on the table by not taking the time to gather the necessary documents to calculate the deduction via the regular method. The regular method is more time consuming to calculate. The regular method determines the home office deduction by splitting indirect costs of the home between personal use and business use. The rate allocated to business use is determined by dividing the square footage of the space used as a home office by the total square footage of the home. This rate is subsequently applied to indirect costs to determine the home office deduction. Some examples of indirect costs of the home that may be deductible utilizing the regular method are utilities, mortgage interest, real estate taxes and depreciation. Don’t feel comfortable calculating this deduction on your own while self-preparing your tax return? Don’t make the mistake of leaving these tax savings on the table. Reach out today for a free quote to have an experienced CPA prepare your tax return – (863) 268-4374.