Today we are going to dive into a very popular topic amongst those who work at home. It’s How to Calculate the Home Office Deduction.

Many of my clients had lots of issues with calculating this deduction this past tax season, so I thought this would be a good topic to cover today. I’ll break down the two ways to calculate the deduction and who qualifies for this deduction.

Who Qualifies for the Home Office Deduction?

If you are a service-based business and you use space in your home exclusively dedicated to business functions and not for personal use (guests, people sleeping over, TV watching, dining, etc..), the space you use in your home for business is deductible.

Two Methods for Calculating the Deduction

The IRS allows for 2 different methods for determining your hoe office deduction. They are:

• The Simple Method
• The Actual Expense Method

3 Easy Steps for Calculating the Simple Method

To calculate the home office deduction, we are going to start off with “The Simple Method.”

Step #1 – Understanding the Rule

To do this, we must first understand the rule itself. So to start things off, it’s important to know that the IRS will give you $5 for up to 300 square feet that are used in your home for business.

Step #2 – Getting Your Measurements

Now we need to measure the space in the home that is used for your business. Be sure not to forget measuring any storage areas and bathrooms that are exclusively used for business.

Step #3 – Calculating the Deduction

For calculating your deduction, let’s use a real world example. For our example, let’s say you are using 200 square foot for business use and you live in a 2,000 square foot house.

The formula that we are going to use looks like this:

Business Sq Ft / Home Sq Ft = Percentage Use of Home

So if we use our example numbers, that gives us:

200 Sq Ft / 2,000 Sq Ft = 10%

Next with The Simple Method, to get our final number, we need to take the

$5/Sq Ft x 200 Sq Ft = $1,000

Pro Tip – For The Simple Method, it’s important to note that the maximum square footage that you can use is 300 sq ft.

3 Simple Steps for Calculating the Actual Expense Method

Now calculating the Actual Expense Method requires more work and is harder to do, but it will yield a lot more benefits for you.

Step #1 – Getting Your Measurements

Just like with The Simple Method, we will need to measure the space we are using for business. And as always, be sure not to forget measuring any storage areas, bathrooms etc… that are solely used for your business.

The first formula for The Actual Expense Method is the exact same as The Simple Method:

Business Sq Ft / Home Sq Ft = Percentage Use of Home

So, using our example numbers again, that gives us:

200 Sq Ft / 2,000 Sq Ft = 10%




Step #2 – Gather Your Expenses

Now it’s on to calculating the direct expenses of running the home for the entire year. This is also known as Annual Expenses.

Step #3 – Doing the Final Calculations

Lastly, we use this formula to calculate our Actual Expenses:

Annual Expenses x Percentage Use of Home = Deduction So with our example, that would be:

$21,400/year x 10% = $2,140 Deduction

Which Deduction is Better?

As you can see the Actual Expenses Method is a much larger deduction than The Simple Method. In fact, it’s $1,140 more. As businesses get larger, I normally recommend they use the Actual Expenses Method since it typically delivers a much larger tax deduction. As always, if you are running a business, I recommend business owners speak with a licensed CPA in order to get every tax deduction you legally have a right to.