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How to Calculate a Home Office Deduction Correctly


In the final column of a three-part series on home office deductions, which includes information on whether one qualifies for this deduction in the eyes of the Internal Revenue Service, tax guru Julian Block explains how taxpayers can calculate the amount of the deduction they are taking on IRS Form 1040.

May 20th 2021
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For those of you who’re just joining in, part one mentioned my responses to a query from Abigail, a self-employed consultant who uses part of her home to conduct her business.

Part two focused on three requirements Abigail must satisfy to qualify for home-office deductions. First, she uses a dedicated space in her home exclusively for work in her business. Second, she does so on a regular basis. Third, it’s her principal place of business.

Part three explains how she calculates her deduction on Form 1040’s Schedule C (Profit or Loss From Business). The IRS authorizes two ways for her to calculate it.

The first way is a simplified method that’s based on the size of her office. Usually, all Abigail need do is multiply each square foot of dedicated office space (up to a maximum of 300 square feet) by $5. Her annual deduction tops out at $1,500, dropping to $750 for an office of 150 square feet.

The second way is more complicated. Abigail has to multiply all of her home-related expenditures by the percentage of her home that she uses as an office. Say her office takes up one-tenth of her rental home; she gets to deduct one-tenth of her rental payments; her write-off could be well north of $1,500.

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By Julian Block
May 22nd 2021 10:54 EDT

Thank you.

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