The home office expense deduction can save you some significant money at tax time if you're self-employed and work out of your home.
The home office deduction is only for self-employed business owners. Effective with the 2018 tax year, most employees can no longer take a deduction for unreimbursed business expenses, including home office expenses. Only a few specific categories of employees can take this deduction on Schedule A.
Who Can Claim the Home Office Expense Deduction?
You must meet two main qualifications to claim this home office expense deduction:
Regular and Exclusive Use. It's not enough that you take care of business bookkeeping in your den most evenings. If your kids are sprawled on the sofa next to you and your laptop, you can't claim a home office expense deduction because the space in question must be used both regularly and exclusively for business purposes.
- Regular use means on a regular basis, not just incidentally or occasionally.
- Exclusive use means used ONLy for your business. The office space must be separate and easily identified, but it doesn't have to be a full room.
Think a spare bedroom you've dedicated entirely to your work or the garage you've adapted to a workshop with no room left over to park your car.
Principal Place of Business. The space in your home that you use for business must also be your principal place of business. This means that you run your operation from this location. If your work involves meeting with clients or customers at their locations, this is permissible if you always return to this work area in your home to deal with the logistics of running your operation -- invoicing clients, scheduling appointments and paying your business's bills.
If you work from several locations, consider the amount of time you spend at each location and the importance of your activities at each location.
There are other qualifications for specific situations, including whether your office is a separate structure, used for storage, or for rental use.
The IRS considers each qualification on a case-by-case basis, IRS Publication 587 Business Use of the Home (page 4) has a chart with more information on qualifying for this deduction.
The Simplified Method for Calculating Home Office Deductions
You have two options for calculating the amount of your deduction. One is far easier than the other, but it has some limitations. Both methods have the same qualifications.
The IRS offers a simplified option which may be appropriate if your home office is on the small side, up to 300 square feet. Multiply the area by $5 per square foot; the maximum deduction is $1,500. Obviously, the smaller your space, the less of a deduction you can receive.
If you use this deduction method:
- You can't take a depreciation deduction for your home,
- You can't use the deduction to take a business loss, and
- You can't carry over a loss from the use of the regular method in a previous year.
"Percentage of Your Home" Method for Home Office Deductions
The more complicated option uses IRS Form 8829 to calculate the home office deduction. This requires that you determine the percentage of the total area of your home, then the area that you use exclusively for business purposes.
If your home's total area is 2,500 square feet, and if your work area is 250 square feet, you're entitled to deduct 10% of qualifying home expenses because they're dedicated to your business. Divide the total usable area of your home by your work area to arrive at your percentage.
First, you can deduct direct expenses that are related only to the business part of your home, with no percentage applied. An example would be painting the room you use "regularly and exclusively" for business.
Second, you can deduct indirect allowable home-related expenses, based on the percentage of your home used for business. These expenses include:
- Casualty losses (with limits)
- Mortgage interest
- Real estate taxes
- Security system
- Homeowner's insurance
- Depreciation on your home's value
- Rent, if you don't own your home
- Whole-home repairs
You can't include expenses for the home that have nothing to do with your business. For example, if you add a patio on the other side of your home, you can't include that in your deduction calculation.
For example, let's say your total allowable indirect home expenses for your whole home are $20,000 for a specific year and your home office space is 10% of your home for business purposes. Your deduction would be $2,000, meaning that you have just saved $2,000 by claiming a home office expense deduction.
Which Deduction Method is Better?
If your home office is 300 sq. ft. or less, do the calculations for both methods and talk to your tax professional before you decide on a method. The limitations on the simplified method may make it less of a benefit.
How to Include a Home Office Deduction on Your Tax Return
If you're self-employed and you pay taxes as a sole proprietor or single-member LLC, you would then report this deduction on Line 30 of Schedule C with your tax return. Partners in partnerships may be able to take a home office deduction. This article on home office deductions and business type has more information.
Disclaimer: Every business situation is unique, and this article is not intended to be tax advice. Not all home businesses are treated exactly the same. Talk to your tax professional before you make any decisions about taking a home office space deduction.