Who Can Take the Home Office Deduction?

Do you qualify for the home office tax deduction? And, if you are qualified, should you take the deduction for working from home? Here’s an explanation of the rules and the methods for deducting at-home business expenses.

Wondering what the home office deduction is and whether it’s something you should take or not?

The home office deduction is a tax deduction that lets taxpayers who qualify deduct certain home office expenses for the business use of their home on their tax return. It’s not a new deduction, but many people who are working from home for the first time wonder if they’ll be entitled to the home office deduction on their income tax return.

Here’s information to help answer your questions. We’ve included a brief overview explaining what the home office deduction is, how you qualify for it, and information about the regular and new simplified option for claiming a deduction for the business use of your home on your annual income tax return.

What is the home office deduction?

The home office deduction is a deduction that allows qualified individuals to deduct a portion of the cost of running their home as a business deduction. It applies to expenses such as mortgage interest, real estate taxes, utilities, and repairs. Individuals who rent a home or apartment and work from their home may also qualify for the deduction.

The home office deduction is separate from and in addition to any deductions the business is entitled to for everyday business expenses. Because it gets deducted from your business income, it reduces the amount of profits that gets recorded as personal income on Form 1040 and reduces the amount of income subject to self-employment taxes (the self-employed version of Social Security) on the business portion of your return.

Home Office Deduction Requirements

To claim the home office deduction, you must adhere to several requirements:

• You must be self-employed or a freelancer.
• A part of your home must be used regularly and exclusively for business purposes.
• The space must be used solely for business and not for personal activities.
• Accurate records of your business expenses, including receipts, invoices, and bank statements, must be maintained.
• You need to calculate the business use percentage of your home expenses, such as mortgage interest, property taxes, and utilities.

Meeting these requirements ensures that you can legitimately claim the home office deduction and reduce your taxable income.

It’s also crucial to understand that you can only deduct expenses related to the business use of your home. If a room serves dual purposes, such as a home office and a guest room, you can only deduct the portion of expenses related to the business use. This ensures that your deductions are accurate and compliant with IRS regulations.

Who can take the home office deduction?

To take the home office deduction, you must be self-employed or a partner who works from home and you must meet the eligibility requirements described below. Small business owners can also take advantage of the home office deduction while they prepare their business tax return.

Employees are not eligible to take the deduction. If you’re an employee who’s required to work from home, your employer may reimburse you for those costs, however (the employer, in turn, can deduct the expenses they paid to reimburse you). And if you’re an employee of your own one-person corporation, the corporation can reimburse you for “accountable” expenses for your home office provided you have no other business location.

The two general requirements to qualify to deduct expenses for business use of your home are:

1. You must use the space regularly and exclusively for business. Your home office won’t qualify for the deduction if you only use it occasionally to catch up on work when you’re home or as an alternative to going into your main location if your kids are sick or out of school. “Exclusively” means that your home office can’t double as the guest bedroom, or be used by the kids to do their homework, or by your spouse to manage your investments or the records for the little league team they coach.
2. The space must be either your principal place of business or a place where you meet or deal with patients, clients, or customers in the normal course of your business. Consultants, physicians, and others who deliver services at locations other than their home office but who conduct the vast majority of their managerial and administrative tasks at an office in their home may also qualify as using the home as their principal place of business.

Daycare businesses can qualify for the home office deduction even if the space is not used exclusively for the business. Business owners who use their home to store inventory or product samples or who have a separate structure on their property that they use for business may also qualify for the deduction. See IRS Publication 587, Business Use of Your Home for further information.

How to Take the Home Office Deduction

If you qualify for a deduction for the business use of your home, you have a choice of two methods to declare it on your tax return. You can use either the regular method determining the deduction or a new, simplified method. These methods both allow you to deduct home office expenses, provided you meet the qualifications such as exclusive and regular use of the home office space.

Related: How to Pay Yourself When You’re a Sole Proprietor

Regular Method

With the regular method, you have to keep records of the actual expenses for running your home and split the allowable expenses between business and personal use. Any home expense that is directly attributable to the business (example: the cost of painting the room you use for your home office) is fully deductible.

Indirect expenses such as mortgage interest, mortgage insurance, real estate taxes, utilities have to be prorated between personal and business use based on the percentage of your home being used for your home office. So, if your home office occupies 100 square feet and your home is 2000 square feet, you’d be able to deduct 5% of the allowable indirect expenses as a home office deduction and the remaining 95% of mortgage interest and taxes on the personal portion of your return. Using the regular method for calculating the home office deduction, you can also take a deduction for depreciation on the house, but that depreciation gets reclaimed when you sell your home.

Expenses that have nothing to do with your home office (example: painting your living room) are not deductible.

Related: Tax Deductions for Self-Employed Business Owners

Simplified Method

The simplified method is like a breath of fresh air for many people who run home offices. Instead of all the tedious recordkeeping requirements and calculations, the simplified option lets you take a deduction of $5 per square foot of your home office up to a maximum of 300 square feet ($1,500). Homeowners using the new option cannot depreciate the portion of their home used in a trade or business. However, real estate taxes and mortgage interest you paid out as a homeowner are not figured into the home office deduction and are fully deductible on the personal part of your return.

Which method should you use? This IRS comparison chart is a helpful guide:

Source: IRS

Record-Keeping Requirements

Accurate record-keeping is essential for claiming the home office deduction. This includes maintaining receipts, invoices, and bank statements related to your business expenses. Additionally, you should keep a record of the square footage of your home office and the total square footage of your home. This information is vital for calculating the business use percentage of your home expenses.

It’s also important to document your business activities. Keep track of the dates and times you work from home, the type of work you do, and the clients you meet with. This documentation will help you demonstrate that you use your home office regularly and exclusively for business purposes, which is a key requirement for the deduction.

Audit Risk and the Home Office Deduction

The home office deduction can be a common audit trigger (especially compared to some other business tax deductions), as the IRS may scrutinize whether you are using your home office solely for business purposes. To minimize the risk of an audit, it’s essential to keep meticulous records of your business expenses, administrative or management activities, and so on.

Be prepared to demonstrate that you use your home office regularly and exclusively for business purposes. This may include providing evidence of your business activities, such as client meetings, phone records, and email correspondence. Additionally, familiarize yourself with the IRS’s safe harbor rules for the home office deduction. These rules offer a simplified way to calculate the deduction and can help reduce the risk of an audit. However, it’s wise to consult with a tax professional to determine whether the safe harbor rules apply to your situation.

By following these guidelines, you can confidently claim the home office deduction while minimizing the risk of an audit.

Should you take the home office deduction if you qualify?

Some people worry about taking the deduction for running their business from home because they fear it will cause their tax return to be pulled for an audit. The rules for qualifying have eased somewhat in recent years, so if you qualify for the deduction, it’s worth considering and discussing with your accountant. Additionally, the IRS has made it much easier than in years past to file for the deduction.

Remember, whether or not you choose to take the home office deduction, you’re still entitled to deduct the regular and necessary business expenses you incur during the year, such as your costs for advertising, promotional materials, paper, improving and growing your business, and other costs of doing business.

Last but not least, if you need help with your taxes, it’s highly recommended to chat with a licensed CPA or tax advisor. They’ll help you sort through the rules and regulations that apply to your unique situation, helping increase your accuracy, and hopefully, your tax refund.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.