Understanding the "Home Office Deduction"

If you’re a freelancer, independent contractor, or small business owner (sole proprietorship and “single member LLCs”), you will be completing “Schedule C”, “Profit or Loss from Business” each year when you file your taxes. And if you’ve got a space in your home (think: desk and chair in an office or in the corner of any room) that is both regularly and exclusively used for business, it is very likely you are eligible for the “home office deduction”.

There are two ways to take the home office deduction: 1. The “Simplified Method”, which we recommend for homeowners, or 2. The “Regular Method”, which we recommend for renters. The reason we recommend the Simplified Method for homeowners is because if you were to use the Regular Method, you’d have to “depreciate” part of your home. “Depreciation” is only a “temporary tax deduction”, meaning it will eventually reverse and become income when you sell the home in the future. It can also be a nightmare to keep track of over the years if you live the same home for a long time.

For the Simplified Method, all we do is take the square footage of your home office and multiply it by 5. So, if you’ve got a 10 x 10 office space, your tax deduction for the year would be $500 (100 square feet * 5).

The Regular Method requires a little more work. Suppose your home is 2,000 square feet and your home office is 100 square feet. That means the square footage of your office space is 5% of the total square footage of your home (100 divided by 2,000). You are then entitled to deduct 5% of all home-related expenses, such as: rent, utilities, insurance, repairs, etc. We recommend keeping track of these expenses each month so that at tax time you don’t have to dig through a year’s worth of records.