Home Office Deductions can seem ambiguous to people who are trying to suss out what they can and can't claim as a deduction. Filling out this part of your tax return comes down to understanding the rules as well as assessing your own risk tolerance.
We created this guide to help you fill out the Home Office Deductions (HOD) portion of the Tax Questionnaire with more ease and clarity.
Before we dive into the questions, there are a few pieces of information you should know up front as you're filling out the HOD section:
- The amounts you enter on the HOD form shouldn't already be in your Heard books. This means these are expenses that you have paid for as a renter/home owner and are only claiming the amounts in this deduction.
- If you are itemizing your deductions and claiming some amounts on your Schedule A, then you cannot claim it on the forms in the HOD section.*
- If you're using the standard method, you must report actual expenses. Do not enter estimates. (See below for differences between standard and simplified method).
Here are some common questions we've received time and again.
How do I know if I qualify for home office deductions?
Your home office must be used exclusively for business, meaning that the space is not used for any other personal use. If your home office doubles as a guest bedroom, gym space or lounge area, it doesn't qualify for receiving tax deductions.
You cannot claim a home office deduction if you have an actual office for your practice. In that case, you’d claim all necessary utilities from your office expenses.
Should I take the Simplified or Standard method?
Let's go over what each method means, and why either might suit you best.
The simplified method means that you’ll only share the total amount of square feet used as part of the home office.
This is better suited for people who:
- Want to take some additional deduction and do not want to track expenses during the year. As the naming goes, this is a simpler method.
- Have a small home office. The calculations are less complex, and there may be a slightly larger deduction by claiming $5 per square foot.
The standard method* is based on the actual expenses that you report, like your mortgage or rent, insurance, utilities and other typical home costs. You’ll also need to calculate the percentage of your home devoted to business activities.
This is better suited for people who:
- Have a large amount of home related expenses that can be attributed to the home office.
- Have a larger home office and high cost utilities/ home expenses.
If you do decide to use the standard method, you will need to collect this past year's bills and receipts in order to add up the total sums. As mentioned above, when you enter the sums, you must report actual expenses. Do not enter estimates.
*This deduction is highly auditable. Please assess your level of risk tolerance when determining which method to use. In general, if it came down to an audit:
- Simplified Method is least risky - you will only need to be able to prove the space size and usage.
- Standard Method is most risky - you would need to prove every expense claimed, the size of the space and usage.
What are indirect expenses?
These are the total costs of owning/renting the home as a whole. These expenses will be allocated based on the square feet used exclusively for business. For example, when you're entering your total rent, you'll add up all of the monthly payments you made during the previous year, and the percentage related to your business space will be applied to the total.
What are direct expenses?
These are costs that deal specifically with your home office. This isn't likely going to be general utility bills. These kinds of costs are things like renovating your home office or fixing a maintenance issue in the office itself.
What if an expense is listed but doesn't apply to me?
If you're being asked to provide an expense that you don't pay, you may put $0.00. This may be the case if you're a renter, so therefore you don't make mortgage payments.
How much can I expense?
Take a moment to assess your risk aversion. If you are risk averse, you may want to only share the expenses you have direct proof of. If you would like to take more risk, you may share amounts that you may or may not be able to prove if it came to an audit.
Keep in mind that you’ll need to show evidence for any information provided, such as receipts and pictures to prove space size.