Home Office Tax Credit: Calculating Income

If you work from home, you may be able to claim a tax deduction for using your home office. This deduction is available for self-employed people who use part of their home exclusively and regularly for business or administrative purposes.

There are two methods for calculating the home office deduction: the simplified method and the actual expenses method. The simplified method multiplies the square footage of your home office by a prescribed rate (currently $5 per square foot for up to 300 square feet). The actual expenses method measures actual expenditures against your overall residence expenses. This method requires you to fill out Form 8829 and calculate the percentage of your home devoted to business activities. You can deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation for that area.

Calculating the percentage of your home devoted to business activities

To calculate the percentage of your home devoted to business activities, you must first determine the square footage of your workplace and divide that by the total square footage of your home.

For example, let's say your home office is a 15-foot by 15-foot room, which equals 225 square feet. If your home has a total area of 1,600 square feet, then 225 divided by 1,600 is 0.14, or 14%. This means that 14% of your total home expenses can be allocated toward the home office deduction.

If the rooms in your home are all roughly the same size, you can calculate the business percentage by dividing the number of rooms used for your business by the total number of rooms in your house.

It's important to note that the space must be used exclusively and regularly for business. If it is used for both business and personal purposes, it does not qualify for the deduction.

Calculating the percentage of utilities, repairs, and depreciation devoted to business activities

To calculate the percentage of utilities, repairs, and depreciation devoted to business activities, you must first determine the square footage of your home office as a proportion of the total area of your home.

For example, if your home office measures 150 square feet and your home has a total area of 1,200 square feet, your business percentage would be 12.5% (150/1200).

Once you have determined the percentage of your home used for business, you can allocate a proportional amount of your total utility, repair, and depreciation expenses to your business activities.

For instance, if your total utility expenses for the year were $1,000, you would allocate $125 ($1,000 x 0.125) to your business activities.

It is important to note that you can only deduct expenses that are exclusively and regularly used for business purposes. Additionally, the total deductible expenses for your home office cannot exceed the income derived from your business.

Calculating the simplified office deduction

The simplified home office deduction is an easier way to determine the amount of expenses you can deduct for a qualified business use of your home. This method was introduced by the IRS in 2013 to reduce the burden of complex calculations, allocations, and substantiation requirements on small business owners.

How to Calculate the Simplified Home Office Deduction:

• Standard Deduction: You can deduct $5 for every square foot of your home office, up to a maximum of 300 square feet. This results in a maximum standard deduction of $1,500 per year.
• Allowable Home-Related Itemized Deductions: You can claim full allowable home-related itemized deductions, such as mortgage interest and real estate taxes, on Schedule A without reducing these expenses by the amounts allocated to your home office.
• No Depreciation Deduction: You cannot deduct depreciation for the portion of your home used for business in the same year that you use the simplified method.
• Gross Income Limitation: The total deduction computed using the simplified method cannot exceed your gross income from the qualified business use of your home, reduced by unrelated business deductions. Any excess amount cannot be carried over to subsequent years.

When to Use the Simplified Method:

The simplified method is beneficial if the deduction you could obtain using the standard method is not much higher than $1,500. Most people with home offices, particularly renters, can qualify for a higher deduction using the standard method.

You can choose to use either the simplified or standard method for any taxable year, but you must be consistent and cannot change methods for the same year once you have made your election on your timely filed, original federal income tax return.

Calculating the regular office deduction

There are two methods for calculating the home office deduction: the standard method and the simplified option.

The Standard Method

The standard method involves completing IRS Form 8829 to compute the actual amount of the deductible home office expenses.

First, calculate the square footage of your home office. For example, if your home office is a 15-foot by 15-foot room, then its total square footage is 225 square feet (15 feet x 15 feet = 225 square feet).

Second, find out the square footage of your home. For instance, let's say your home has a total area of 1,600 square feet.

Third, divide the area of your office by the area of your house. In our example, 225 ÷ 1,600 = 0.14 (or 14%). This decimal represents the percentage of your total home expenses that can be allocated toward the home office deduction.

After determining the percentage of your household expenses that can be written off, list all the expenses that pertain to your entire home, such as mortgage interest, real estate taxes, insurance, utilities, and depreciation for the year under the "Indirect expenses" section of Form 8829.

Expenses incurred solely for the benefit of the office space are then listed under the "Direct expenses" section of the form. The indirect expenses are totaled and multiplied by the percentage derived earlier (14% in our example). Then, the indirect expenses total is added to the total of the direct expenses.

The Simplified Option

The simplified option involves multiplying an IRS-determined rate by the square footage of your home office. To use the simplified option, your home office cannot be larger than 300 square feet, and you won't be able to deduct depreciation or home-related itemized deductions.

The prescribed rate is $5 per square foot, with a maximum of 300 square feet. For example, if your office measures 150 square feet, then the deduction would be $750 (150 x $5).

The simplified option is intended to reduce the burden of complex calculation, allocation, and substantiation requirements of the standard method.

Calculating the home office deduction for employees in Canada

Employees in Canada can claim a tax deduction for home office expenses, which can include office supplies, phone expenses, and utilities. To calculate the amount you can claim, you must first determine your eligibility. For example, you must be working from home due to the COVID-19 pandemic or because your employer requires you to. You must also have certain forms completed and signed by your employer.

Once you have confirmed your eligibility, you can use the Detailed method or the Temporary flat-rate method to calculate your claim.

The Detailed method requires you to separate your expenses into those for employment use and those for personal use. You will need to calculate the size of your workspace and the total finished area of your home. You will also need supporting documents for all the expenses you plan to claim.

The Temporary flat-rate method does not require you to determine your expenses. Instead, you can claim a set amount per day that you worked from home due to the COVID-19 pandemic, up to a maximum of $400 in 2020 and $500 in 2021 and 2022.

You can use the calculator provided by the Canada Revenue Agency to help you determine the amount of workspace expenses you may be able to claim.

Frequently asked questions