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.
This information is for small business owners. Under the new 2017 tax law, employees who work from home are no longer able to deduct these expenses as miscellaneous deductions on Schedule A of their personal tax returns. (See IRS Publication 529, Miscellaneous Deductions, for more information.
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. 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:
Principal Place of Business. 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.
Regular and Exclusive Use. 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 a regular basis.
Other qualifications include working from a separate structure or using the space for storage or for rental use.
The IRS has a chart to help you figure out if you can take a deduction for the business use of your home (IRS Publication 587, page 4).
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. The calculation is done on IRS Form 8829.
First, you must calculate the part of your home used regularly and exclusively for business. 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.
Then you apply the percentage to indirect expenses, those for your entire home that are deductible based on the percentage used for business.
You can also take direct expenses (those only for the business part of your home) at 100%.
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:
- 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.
- Your home office space must be 300 square feet or less.
The percentage is set by the IRS, currently at $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.
Check out this article on the simplified deduction. There are some limitations and restrictions on taking this deduction that might affect your tax situation.
Business Space Deduction on Your 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 your ownership percentage.
Schedule C Businesses
If you use the simplified method, use Line 30 to include the calculation (square footage for your office x $5 (maximum 300 sq. ft.).
If you use the regular method, you will need to complete Form 8829 and enter the result on Line 30.
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. As noted above, you are no longer able to take a deduction for these expenses if they are not reimbursed by your company.
Partners in Partnerships/Multiple-Member LLC Owners
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 for working from home. The IRS explains:
"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.
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,
IRS. "Publication 587 Business Use of Your Home." Principal Place of Business. Page 3. Accessed Jan. 5, 2020.
IRS. "Publication 587 Business Use of Your Home." Exclusive Use. Regular Use. Page 3. Accessed Jan. 5, 2020.
IRS. "Publication 587 Business Use of Your Home." Qualifying for a Deduction. Page 3. Accessed Jan. 5, 2020.
IRS. "Publication 587 Business Use of Your Home." Using Actual Expenses. Page 6. Accessed Jan. 5, 2020.
IRS. "Simplified Option for Home Office Deduction." Accessed Jan. 5, 2020.
IRS. "Instructions for Schedule C." Line 30. Page 1. Accessed Jan. 5, 2020.
IRS. "Instructions for Form 8829." Accessed Jan. 5, 2020.
IRS. "Publication 587 Business Use of Your Home." Partners. Page 19. Accessed Jan. 5, 2020.