Home office deduction calculator
Two ways to figure it — a flat $5 a square foot, or your office's share of what the home actually costs — and they can differ by thousands. This works out both, picks the larger, and shows what it's worth in tax. If you own an S corporation, it works differently; that's here too.
How the calculator works
The simplified method is $5 for each square foot of office, up to300 square feet. The regular method is the office's share of the home — its floor area over the home's — times a year of the home's costs, plus depreciation over 39years if you own the home. The calculator shows the larger and what it saves: income tax, and for a sole proprietor self-employment tax as well.
It assumes the office qualifies and that the business earns more than the deduction. The rules on both, and on choosing a method, are in the home office deduction guide.
One thing it can't see: if you itemize, the office's share of mortgage interest and property tax was deductible anyway, so under the regular method only the rest of the costs and the depreciation are new deductions — though the business share also lowers self-employment tax.
A worked example
The owner of Harbor & Pine Design, the fictional business in our sample report, works from a 240-square-foot office in a 2,000-square-foot home — 12%. The home costs $22,500 a year in mortgage interest, property tax, insurance and utilities. The regular method gives 12% of that, $2,700, before any depreciation; the simplified method gives 240 × $5, $1,200. The regular method is worth more than twice as much.
If you own an S corporation
An S corporation owner who works in the business is its employee, and employees can't deduct a home office on their own return. Instead the corporation reimburses you for the office's share of the actual costs under an accountable plan — tax-free to you, deductible to the corporation. The simplified method is for your own return, so it doesn't apply. Our accountable plan template includes the home office allocation in its filled-in example. Whether the reimbursement should include depreciation is a question for your CPA.
Whether your space qualifies is a question for your CPA or tax attorney before you claim it.
Sources
- IRC §280A — the qualifying uses, the employee test, the daycare and storage rules, and the income limit
- IRS Publication 587 — both methods, depreciation, carryovers, and selling the home
- IRS simplified option and Rev. Proc. 2013-13 — $5 a square foot, 300 at most
- IRC §67(h) — no deduction for most unreimbursed employee expenses
General information, not advice for your situation. Whether a strategy fits depends on your facts — talk to your CPA or tax attorney about whether you qualify before you put it in place. Your accountant remains responsible for your return.
OpenYear
One strategy is a start. What else could fit?
We're building OpenYear to connect the signals in your books to potential tax opportunities, keep checking as your business changes, and help you act with your accountant. Access is by approval, with small monthly onboarding groups planned as we expand support to more business types.