Mastering Home Office Deductions: Unraveling IRS Guidelines for Calculating Your Business Percentage
Do you have a home office that qualifies as your principal place of business? If the answer is yes, you might find this information helpful when calculating the percentage of your home that is used for business.
When calculating what percentage of your home is used for business, the IRS tells us:
To find the business percentage, compare the size of the part of your home that you use for business to your whole house. Use the resulting percentage to figure the business part of the expenses for operating your entire home.
Publication 587, page 20 goes on to state that you can use any reasonable method that accurately reflects your business-use percentage.
Form 8829 says to take square footage of the space you regularly use and then subtract it from your total square footage to get the percentage. This gross square-foot method is certainly the most commonly used—it is straightforward and will still give you many benefits.
There are however, a few other allowable ways to calculate your percentage, including the net-square-footage method. With this method, you calculate your total home square footage by subtracting any square footage taken up by:
- outside walls
- water heaters
The resulting total will be your net “usable” square feet. You then use this number for your total home square footage and deduct your home office area to calculate the percentage. Here is a quick example of the difference the net-square-footage method can make vs. the gross square footage method.
A helpful suggestion is to thoroughly review both Publication 587 and the instructions for Form 8829. Doing so may unveil additional opportunities to enhance your deduction, such as considering the inclusion of business storage space within your home. If you regularly store business supplies or inventory in a designated area of your home, there's a chance you can incorporate that space into the total business square footage for a potentially increased deduction.
As always, we recommend seeking the help of a knowledgeable and licensed tax advisor. If you find yourself in need of a recommendation, give us a call and we can send a few your way!