If you own a business and work from home in any capacity, you may be able to write-off a portion of your home expenses. If you are eligible, you may have able to save thousands of dollars in taxes.
But, the IRS has some pretty strict rules about who and what qualifies for this tax benefit. It can be tough to understand the nuances, which is why we’re publishing this post to guide you in the simplest manner.
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What is the Home Office Deduction?
The IRS provides this tax benefit to both, homeowners and renters, who use part of their home exclusively for business purposes. Those who qualify can subtract certain home expenses from their taxable income to cut their tax bill.
To qualify for the home-office deduction, you must meet certain requirements, including being self-employed.
If you earn 1099 income, business income, or income that is not taxed through an employer, you likely qualify.
In other words, you do not receive W-2s to report your income. Rather, you use 1099s to report your income or self-report it.
Employees are unable to use the home-office deduction. You must be self-employed.
For instance, if you work from home remotely as an employee alongside your self-employed spouse, only the self-employed spouse can take the deduction.
In addition to being self-employed, you must own or rent your personal residence. The home expenses you wish to write-off must be expenses that you are personally responsible for.
What home space qualifies?
The home space you use for business must be exclusively used for business activities. For instance, if you have a spare bedroom that serves as your office and your child’s playroom, that’s likely to make you ineligible for the deduction. You can’t just have a desk in your guest room and call it your office since it is sometimes used for company.
You must have dedicated home space the is “exclusively and regularly used for business purposes“.
The area you use for business doesn’t have to be inside your home. It can also be a separate structure on your property, such as a garage, storage shed, or barn. All that matters is it meets the exclusivity requirements.
“Exclusive” use also doesn’t mean you have to leave the area to make or take a personal phone call, or rush to the aid of a family member.
While it’s true some IRS agents may be more strict about this than others in an audit, the idea is that personal activities do not routinely invade and overtake business activities in the space.
What Home Expenses Can You Deduct?
If you qualify for the home-office deduction, you can deduct a broad range of various home expenses.
The IRS classifies the types of expenses you can deduct into two categories: Direct and Indirect expenses.
Direct expenses are what you pay only for the business area in your home. For instance, if you paint your home office or repair the electrical wiring, this is a direct expense.
Direct expenses are 100% deductible as a business expense.
Indirect expenses are what pay to keep your home up and running. Examples include general repairs, utilities for your home, and homeowner’s or renter’s insurance.
You can only deduct a percentage of indirect expenses. More on that shortly.
Almost every type of home expense can be factored into the home-office deduction, such as:
- Mortgage interest
- Real estate taxes
- Repairs and maintenance
How To Calculate Your Home Office Deduction
Taxpayers can choose one of two ways to calculate the deduction: Simplified or Regular. One of these methods will be more beneficial to you, depending on your preferences.
The Simplified Method
With the simplified option, you’re not deducting actual expenses. Instead, you multiply the square footage of your business use space by a predetermined rate. As of 2023, the prescribed rate is $5 per square foot for up to 300 square feet of space.
This means under the simplified calculation, your maximum deduction is $1,500.
- Quick and easy way to save on your taxes
- Less stringent record-keeping requirements
- For many, it results in leaving money on the table
- Potentially pay higher taxes
Regular Method (Actual Expenses)
To maximize tax savings, the regular method is preferred.
This method takes the square footage used for business purposes and divides it by the total square footage of your home to come up with a percentage.
For instance, if you have a 3,000-square-foot home (1,000 feet on two floors, plus a basement) and use the full 1,000-square-foot basement for your home office, then your percentage is 33%.
Then, you apply that percentage to all the applicable expenses.
Start by adding your home expenses. For example:
- Monthly Mortgage/Rent: $1,500
- Monthly Utilities/Other Home Expenses: $500
- Monthly Total Home Expenses: $2,000
Because your filing taxes for the full year, you’ll multiply this number by 12 to determine the full amount you pay yearly.
$2000 x 12 = $24,000
Now, multiply the $24,000 by 33% to get your total home office deduction.
Using this model, your home office tax deduction is $7,920.
That’s a significant difference when compared to using the simplified method.
Which is the best method for you? Typically the one that saves you the most amount of money in taxes.
- Potential for greater tax savings
- More complex calculations and recordkeeping. You must have receipts to support your claims in the event of an audit.
Generally speaking, it’s best to calculate the deduction both ways and see which one is larger. You can switch methods from year to year, so it’s wise to take the one that benefits you the most.
How to Claim the Home Office Deduction
Claiming the home office deduction varies slightly depending on the type of business you’re running
Self-employed taxpayers claim the deduction on Form 1040, Schedule C, Line 30. They must compute the deduction using IRS Form 8829 unless taking the simplified deduction.
S-Corporations and C-Corporation may claim this deduction through an accountable (reimbursable) plan.
If your home office expenses are more than your business income for the year, you will not be able to use the deduction to make your income go below zero. Using the standard method, however, could allow you to carry over the difference in business expenses to the next year when your business earns more income. Carryover isn’t allowed with the simple method.
Common Mistakes to Avoid
When taking the home-office deduction, make sure you are aware of these common mistakes.
Not Keeping Receipts
If you plan to deduct actual expenses, keep records of all the expenses you may deduct, from utility bill payments to equipment purchases and repairs.
Selling Your Home
As a homeowner, if you take the home office education using the regular method, you may be unable to avoid paying the capital gains tax when selling your primary home. According to IRS Publication 523, anyone who sells their primary home after living it for at least two of the five years prior to the sale doesn’t have to pay taxes on the first $250,000 in profit or, if married filing jointly, $500,000.
Using the regular method, you must depreciate your home’s value. Depreciation is an income deduction that allows you to recover property costs because of deterioration, obsolescence, or wear and tear.
Letting Anxiety Get the Best of You
Don’t let the fear of an audit stop you from taking a deduction you’re entitled to. Skipping it could cost you thousands in taxes!
The Impact of the Tax Cuts and Jobs Act on Home Office Deductions
If you’ve heard in the past that you could take this deduction as a W2 employee, you may have been correct. However, the Tax Cuts and Jobs Act of 2017 prohibits employees from taking this deduction from 2018 to 2025.
If you’re an employee who receives a W2 or paycheck from an employee, even if you work remotely from a home office every day, you’re not eligible to take this tax deduction.
That said, if you work part-time as an employee for a company, whether remotely from home or in the office – you are still eligible to take it for the time you spend working on your own business.
What’s next for the home office deduction?
There are no significant changes in how to take the home office business deduction at this time. As of now, the next time we’ll see changes is in 2026, when employees may become eligible to take the deduction again.
Get Help from Expert Tax Professionals
The simplified method makes it easier to claim the deduction but may not help you get the most tax savings. If you’re unsure which method to use to calculate your home office deduction, contact the experts here at MyCPA Coach. Our tax planning services can help you slash your overall tax bill. We’ll help you find as many tax breaks as possible. And we can even help you file the return.