Understanding The Home Office Deduction

Do you run your business from your home? The home office deduction can serve as a huge write off for your business. In order to ensure you are taking full advantage of the deduction, it is important that you are aware of all the elements and documentation required.

What is the home office deduction?

The home office deduction allows business owner’s to take a deduction if they use a portion of their home to conduct business. It is taken as a deduction on the owner’s personal tax return using Form 8829.

How is it calculated?

allowable home expenses X  home office ratio

allowable home expenses: defined below in documentation

home office ratio: square feet of office space / square feet of entire home

 Who can take the deduction?

Sole proprietors, LLC’s taxed as individuals and partnerships can all take the deduction on their personal tax returns via Form 8829.

C-Corps and S-Corps may also take a deduction for home office expenses; however, it is done via an accountable plan as a reimbursement from the business. It is a more complicated process than Form 8829, so I recommend you work with a tax professional in this instance to ensure it is done correctly.

I heard home office deductions can be an audit red flag for the IRS, is this true?

 Yes, it is a frequently audited deduction that can open an individual up for a general audit. This does not mean you shouldn’t take it, but it does mean you should take extra care in keeping good documentation which we will cover below. Tax preparer’s may differ in the documentation they require, but I encourage you to document and retain everything yourself anyways.

How do I figure out the square footage ratio?

 Many tax preparers will not actually ask for documentation for this piece, but in case of an audit, I would recommend at least knowing where you can easily find this information.

Overall Square Footage

This is your square footage for your entire home. If you rent, your lease agreement will likely have this or check with your landlord to see if they can provide you a floor plan. If you own, you should be able to find this in your original signing documents or real estate databases such as Zillow should also have this information.

Home Office Space

For this portion, just use measuring tape! Ensure the space you are measuring is ONLY used as your office space. If the room your office is in serves another purpose, you should not use the square feet of the entire room. Instead, just measure your desk area plus an additional few feet around it.

What do I need to provide as documentation?

 You will need to provide documentation of bills or invoices for each month, quarter or payment period (however you are billed). Keep in mind, most everyone pays taxes on a cash basis, which simply means provide all the bills you actually paid during that tax year. So if paid a bill for December 2020 in January 2021, you still include it. 

Utility Bills

•  Energy / Electric / Gas

• Sewer

• Water

• Garbage

• WIFI (some CPA’s will include WIFI separately, but regardless, the bills will still need to be provided)

Rent or Mortgage

For those who rent their home:

•  Renter’s insurance

• Rental Payments (a rental lease, check stubs, or proof of electronic payment can be used as documentation).

 For those own their home:

•  Home Insurance

• Mortgage Interest

• Real Estate taxes

• Repairs and Maintenance  

Most these items for a home owner can be found Form 1098  that you will be providing to your tax preparer for your itemized deduction anyways.

How should I keep track of all these documents?

I recommend keeping track of all these documents throughout the year to save time during tax season. Create Google Drive folders and add the documents each month or use a file retention software such as Hubdoc. All my clients that use Xero automatically get a subscription to Hubdoc, it is as simple as forwarding the PDF bill to a unique Hubdoc address and it automatically files the bill in a vendor folder that you can download at the end of the year.

The home office deduction can be highly beneficial for tax savings. As long as you keep good documentation, the process should be an efficient deduction for your taxes.  I highly recommend keeping track of these items throughout the year so you can easily hand them over to your tax accountant and not be digging through your emails from the last 12 months!