Home Office Deductions and Business Type
If you work from your home as a business owner, you may be able to qualify to get a tax deduction for your home office expenses. How you report the expenses and the types of expenses you can claim for your home office depend in part on the legal type of your business.
How to Qualify for a Home Business Space Deduction
In every type of business, you may be able to have your home business space expenses qualify as a tax deduction. This deduction may be available if you are an employee or if you are a business owner. The first step is to figure out if you qualify for this deduction.
To meet the qualification test, your home business space must meet several criteria:
- First, this home business space must be your principal place of business. If your home is the only place where you do business, it's easy to say it's your principal place of business. If you do business from home and also from another location (an office, maybe), the relative importance and amount of time you spend at each location matters. This is considered on a case-by-case basis, so talk to your tax professional if you aren't sure.
- Second, and the most important criterion to be able to deduct home office expenses, is that the space you claim must be used both regularly and exclusively for business purposes. That means you can't do anything else in that space at any time, and you must use it on some regular basis.
Calculating Your Home Office Space
The second step in taking a home business deduction is to calculate your home office space for expense deduction purposes, you can use the percentage method (dividing the home office square footage by the total home square footage) or, if all rooms are approximately equal, divide the number of rooms used for business by the total number of rooms.
You don't have to use an entire room for your home office; you just need to be able to separate that area from other uses and show that it is being used exclusively for business purposes.
A Simpler Way to Take a Home Office Space Deduction
The IRS allows home-based businesses with small offices to use a simplified calculation for taking the deduction. To take this deduction:
- First, you must qualify for the home office space deduction, meeting the criteria of "principal place of business" and "regular and exclusive use" as described above.
- Second, your home office space must be 300 square feet or less.
The percentage is set by the IRS. Currently (2019), it's $5 per square foot, capped at $1500 per year. So, if your home office space is 100 square feet, you can deduct $500 on your business tax return.
After you have determined that you qualify and you have calculated your space, you must include information on your business tax return. How and where you enter this information depends on your business type and whether you are a business owner or an employee.
Businesses That Use Schedule C for Business Taxes
If you use Schedule C to determine your business taxes, you can use Form 8829 to calculate your home office deduction. Only sole proprietors and single-member LLC owners can file business taxes on Schedule C.
In addition, home office expense deductions for business owners filing on Schedule C are limited; you cannot create a business loss with these expenses.
Read more about how to use Form 8829 to calculate your home office expenses.
Owners/Officers of Corporations
If your business is a corporation or S corporation, and you are an officer of the corporation, you are paid as an employee. Employees can deduct some home office expenses if:
- Your business use of your home is for the convenience of your employer, and
- You do not rent any part of your home to your employer and you use that part of your home regularly and exclusively for business purposes.
The "convenience of employer" test is not a clear-cut rule; it depends on the circumstances. But, in general, the employer should require the use of the home office and it is difficult to prove if the employee has an office at the business location. If your corporation is home-based, it should be reasonable to demonstrate that your home office expenses are deductible.
It may be possible to deduct expenses the business use of your home as an S corporation employee, but it's tricky. Your best bet is to talk to your tax professional.
Partners in Partnerships/Multiple-Member LLCs
If your business is a partnership or multiple-member LLC (taxed as a partnership), you may be able to claim a home office space deduction on the same basis as employees of corporations. The IRS says:
"You may be allowed to deduct unreimbursed ordinary and necessary expenses you paid on behalf of the partnership (including qualified expenses for the business use of your home) if you were required to pay these expenses under the partnership agreement, and they are trade or business expenses "
You can use either the simplified or regular method, depending on the size of your home office.
The 2017 tax law (Tax Cuts and Jobs Act) has removed several Schedule A deductions, beginning with the 2018 tax year. You can't claim miscellaneous itemized deductions on your personal 1040, including expenses for using your home as an employee.
IRS Publication 587: Business Use of Your Home has more details on what's deductible and how to take the deduction, based on your business type.
Disclaimer: The information on this site is intended to provide a general overview of a topic, with further resources you can consult. The author is not a CPA or attorney and this information is not intended to be legal advice. Every situation is different. Before you make any tax decisions, check with your tax advisor,