Tax Advice I’m Not Giving: Home office expense

Disclaimer: I’m not a tax professional and I’m not here to give you tax advice.

BUT….

I had a chat with Claude (my favorite LLM) about how to calculate my home office expense.

(This is relevant to you if you work from home and it’s your primary office).

🤔 Did you know that there are 4 methods of calculating a home office expense for tax purposes?

Claude’s summary of our conversation (view the entire exchange below):

“Here's a summary of the four methods for calculating home office deductions:

Simplified Method:

  • $5 per square foot of office space (up to 300 sq ft)

  • Maximum deduction (per year): $1,500

  • No need to track actual expenses

  • Quick and straightforward, but might result in a smaller deduction

Room Count Method:

  • Divide number of rooms used for business by total rooms in house

  • Example: 1 business room ÷ 8 total rooms = 12.5%

  • Good for homes with similarly sized rooms

  • May yield higher percentage than total square footage method

Total Square Footage Method:

  • Divide office square footage by total home square footage

  • Example: 200 sq ft office ÷ 2,000 sq ft home = 10%

  • Apply this percentage to all eligible home expenses

  • Most common traditional approach

Usable Room Method:

  • Divide office square footage by total square footage of usable rooms only (excluding hallways, etc.)

  • Example: 200 sq ft office ÷ 1,800 sq ft of usable rooms = 11.1%

  • May result in a higher percentage than the total square footage method

  • Less commonly used but still acceptable.”

And the following is the entire conversation:

Tal Zamir:

I own and run a recruiting firm and I'm looking for some tax guidance. You are a tax professional that works with small businesses. I work remotely 100% of the time and have a home office. What is the correct way to calculate how much I can write off for my home office as an expense for my business?

Claude.ai:

As a small business owner with a home office, you have two main options for deducting your home office expenses:

  1. Simplified Method: Deduct $5 per square foot of your home used exclusively for business, up to a maximum of 300 square feet ($1,500 maximum deduction).

  2. Regular Method: Calculate the percentage of your home used for business (divide the square footage of your office by the total square footage of your home). Then apply this percentage to eligible home expenses like:

    • Mortgage interest or rent

    • Property taxes

    • Utilities

    • Insurance

    • Repairs and maintenance

    • Depreciation (if you own the home)

To qualify for either method, your home office must be:

  • Used regularly and exclusively for business

  • Your principal place of business

Since you work remotely 100% of the time, you likely meet these requirements.

I recommend keeping detailed records of all expenses and measurements to support your deduction in case of an audit. Consider consulting with a tax professional familiar with your specific situation for personalized guidance.

Tal Zamir:

Thank you. I've heard that there are multiple ways to calculate the % of the home used for an office. One method is to calculate the sq ft of the office and then divide it by the sq ft of all rooms, which excludes hallways. Is that method also correct?

Clauade.ai:

Yes, that alternative calculation method is valid, though it's slightly different from the most common approach.

When using the Regular Method, you can calculate the business percentage in two main ways:

  1. Total Square Footage Method (most common): Divide the square footage of your office by the total square footage of your entire home, including hallways, bathrooms, etc. Example: 200 sq ft office ÷ 2,000 sq ft home = 10% business use

  2. Room Method: Divide the number of rooms used for business by the total number of rooms in the house (excluding hallways and bathrooms). Example: 1 room for business ÷ 8 total rooms = 12.5% business use

The method you mentioned - calculating office square footage as a percentage of only "usable" room space (excluding hallways) - is a variation that some tax professionals use. This might yield a higher percentage than the total square footage method, potentially increasing your deduction.

The IRS doesn't specify which method you must use, but you should:

  • Choose one method and use it consistently

  • Be prepared to justify your calculation if audited

  • Ensure your calculation reasonably reflects the business use portion

The method that works best depends on your specific home layout and should be documented with floor plans or measurements.

Tal Zamir:

Thanks! So it looks like there are 4 potential ways to calculate this (simple, total sq. ft., room method and usable room method) - can you summarize these?

Claude.ai:

Here's a summary of the four methods for calculating home office deductions:

  1. Simplified Method:

    • $5 per square foot of office space (up to 300 sq ft)

    • Maximum deduction: $1,500

    • No need to track actual expenses

    • Quick and straightforward, but might result in a smaller deduction

  2. Total Square Footage Method:

    • Divide office square footage by total home square footage

    • Example: 200 sq ft office ÷ 2,000 sq ft home = 10%

    • Apply this percentage to all eligible home expenses

    • Most common traditional approach

  3. Room Count Method:

    • Divide number of rooms used for business by total rooms in house

    • Example: 1 business room ÷ 8 total rooms = 12.5%

    • Good for homes with similarly sized rooms

    • May yield higher percentage than total square footage method

  4. Usable Room Method:

    • Divide office square footage by total square footage of usable rooms only (excluding hallways, etc.)

    • Example: 200 sq ft office ÷ 1,800 sq ft of usable rooms = 11.1%

    • May result in a higher percentage than the total square footage method

    • Less commonly used but still acceptable

For any method except the Simplified Method, you'll apply the calculated percentage to eligible expenses like mortgage/rent, utilities, insurance, etc. Choose the method that best reflects your situation and provides the most favorable deduction, while being prepared to justify your choice if questioned.

Tal Zamir:

Thank you!

Claude.ai:

You're welcome! If you have any other questions about home office deductions or other tax matters related to your recruiting business, feel free to ask. Good luck with your tax planning!