The COVID-19 pandemic turned home offices into the place to be, and that makes the home office deduction a very pertinent topic, especially as we move closer to tax season. If you spent a lot of time in your home office over the last two years, you may now be wondering, “Do I qualify for the home office deduction?”
Before you get excited, you should know that this deduction is not available to employees, only business owners. If that’s you, then here’s everything you need to know about the home office deduction.
Start By Testing It Out
If you do own a business, there’s two tests that you need to look at in order to qualify for this deduction. The first test is the exclusivity test. Is your home office used exclusively for work purposes? Even if you work in it, the space you’re claiming as your home office can’t be multi-purpose, like a kids’ playroom, homeschool room, or even guest bedroom. It has to be used regularly (like on a weekly or daily basis) as an office.
The second test is the principal test. If you’re going to claim the home office deduction, then that office space has to be your principal place of business. All this really means is that your administrative and management tasks are done in your home office.
The Exclusivity Test
We get a lot of questions from doctors, dentists, and other professionals who want to know if they’re exclusively using a space when working on their laptop at their kitchen table, or staying home from work on a Friday and doing work at their kitchen table. Unfortunately, that really doesn’t qualify as exclusive.
Again, you have to have a special room in your house that’s partitioned off and used exclusively for your business. That means four walls, a computer, a desk, and a door that shuts!
Now, that’s not to say you can’t ever have a kiddo walk in and answer a question they have. A good rule of thumb is that anything you can do personally in a typical office setting, you can also do in your home office… just not all the time.
The Principal Test
A principal place of business doesn’t necessarily mean it’s where you spend most of your time. It just means this is the space where you perform the management and administrative tasks of running a business. Paying bills, keeping up with your tax requirements, completing paperwork for the government, and anything else along those lines that you can do in your home office can help qualify that space as your principal place of business.
The best part here is that even if you’ve got your own brick and mortar office, you can still have a home office! Especially with the pandemic, there have been a lot of Zoom calls and other virtual meetings happening at home as dental practices were shut down. Even now, you can still have these calls with team members at home on a Friday and perform administrative and management functions.
How the Home Office Deduction Benefits You
There are two ways you can calculate the deduction.
The first one is a simplified method where you measure the square footage of your office and then multiply that by $5. You would get that as a deduction, basically from your business’s income, at a maximum of 300 square feet.
The second way is where you use the actual expenses from your home, such as your home’s real estate taxes and interest. Then, you would extrapolate the home square footage and your office square footage of the home and multiply that by your actual expenses. That number would be the deduction you could take on your business’s tax return.
In many cases, if you choose to take the home office deduction, following the simplified method is easier. And while the home office deduction may not seem like much, when you combine it with other deductions, like your auto deduction, you’ll notice it adds up — and you want all the deductions you can get!
Need Some Financial Guidance? We Can Help!
If you have a home office space that’s used exclusively or principally for business purposes, then the home office deduction is one that you should qualify for. Of course, this simple deduction isn’t going to make you a multimillionaire, but it’s out there and if you do it right, and actually use it, you can benefit from it.
At Duckett Ladd, we know you want to successfully run your practice and achieve your ideal quality of life. Our accounting, tax planning, and business strategy services can help you do it. To find the fastest solution to your business challenges, get in touch with our team today!
Duckett Ladd, LLP does not provide tax, legal, or accounting advice. This content has been prepared for informational purposes only and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Also, tax law is ever-changing and every effort should be made to seek out the most current information. Make sure to check the date of published content to ensure the most current information.
