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Small business owners who work out of their homes may be eligible for a home office deduction on their federal income taxes, as long as it’s their principal place of business and its use for business activities is regular and exclusive. In other words, a home office must be an office in the most commonly understood sense: The place where your business is conducted, free of personal effects and use.
It’s important to note that the home office deduction typically applies to self-employed people or those who pursue income-producing activities under their own employ, such as side-giggers. This is different from employees who may work from home for an employer.
What’s the home office deduction and how much is it?
The home office deduction allows self-employed taxpayers to deduct from their taxes the expenses related to a portion of their home that is used as a principal place of business. There are two ways of calculating the home office deduction: the simplified option or your actual expenses. These two methods will likely produce different numbers; it’s best to calculate both and use the larger figure as your deduction.
The simplified option allows you to deduct $5 per square foot of your home that is used for business, with a maximum allowance of 300 square feet. Under this method you list home-related itemized deductions, such as mortgage interest or real estate taxes, in full on your personal Schedule A, and not as a deduction related to your business. This option doesn’t allow you to deduct your home depreciation.
The method based on your actual expenses requires you to calculate what percentage of your home you are using for your business and to tabulate the actual expenses associated with that space, such as a corresponding percentage of mortgage interest, homeowners’ or renters’ insurance, utilities and depreciation.
Anything you pay to keep up the home in which your office is located counts: security system, home maintenance and lawn care, for instance. However, ask an accountant before proceeding: Things may get complicated if you own your home and account for home repairs or improvement as a business expense, as this may result in exclusions on the capital gain when you sell your home. Home-related expenses are divided appropriately between Schedule A and the business Schedule C.
Simplified vs. regular method: which one is better?
Which of these methods to use will depend on your particular situation. If your office is a 50-square-foot room in a 2,000-square-foot house, your simplified deduction will total $250 (50 square feet x $5 per square foot), while your deduction under the regular method will be the total of 2.5 percent of all your allowable home expenses (since 50 square feet is 2.5 percent of 2,000 square feet). Say your various house-related costs add up to $18,000 annually; your deduction under the regular method would be $460, and you’d be better off using this method.
Checking for eligibility
As we mentioned earlier, you are generally only eligible to claim the home office deduction if you are self-employed or have self-employment income from activities in addition to a full-time job.
The office space you are claiming on your taxes must be the primary place of business for those activities and must be in regular use exclusively for that business purpose. An exception would be day care operators who use their homes for personal and business purposes.
"You can’t be using your second bedroom as your home office if you’re also using it not as an office," says Luke Frye, a certified public accountant (CPA) based in Seattle, Washington. "It doesn’t have to be in a separate room, [but] it needs to be a separate place."
Say you do business at a desk in a guest bedroom. You aren’t allowed to deduct the whole room since there’s a bed in it, but you can deduct the square footage that contains your desk, chair, and filing cabinet. The IRS says you may use any "reasonable" method to figure the business percentage of your home: area or by the number of rooms you use for business, assuming the rooms in your home are about the same size.
The home office deduction can get a little tricky, especially if you’re using the regular method of calculation. Here are some common mistakes people make in claiming this deduction:
- Deducting non-allowable costs. One mistake is trying to include elements in your home office deduction that aren’t allowed. For example, a homeowner might try to deduct a portion of their entire mortgage payment — not just of the allowable mortgage interest — as part of a home office deduction.
- Fully deducting costs that are not wholly for business use. Some home expenses, such as internet service, are split between personal and business use. Frye recommends deducting the home office percentage since it’s hard to document a larger percentage.
- Not deducting things you could deduct partially. Many people neglect to deduct portions of various home-related costs such as mortgage interest or utility payments.
How to claim the deduction
The simplified method is indeed simple: Multiply the square footage of your qualified home office times $5. The maximum you can write off is $1,500. For those using the regular method, you'll need to fill out Form 8829, Expenses for Business Use of Your Home.
You can find a handy worksheet to figure the deduction for business use of your home on page 20 of Publication 587, Business Use of Your Home. Still, it’s best to hire a professional accountant or tax advisor to help you, as it can get complicated and you’ll need to justify what you claim.
For documentation, save receipts or digital records of your home-related expenses and maintain good bookkeeping. Keep a copy of your lease or home purchase documents that list actual square footage. Tape off the space you’re claiming and take pictures to document it.
"The burden of proof is always on the taxpayer; [you] have to substantiate or prove that it’s a business expense," says Frye. "You really have to be diligent about separating your business from your personal: separate bank accounts, good bookkeeping, save those receipts."
Home office deductions can get tricky, though the principles are fairly simple. Read on for some common Q&As about the details of how to make sure you account for your home workspace properly come tax time.
Can I write off my home office?
You can write off a home office if you are self-employed and regularly use that space exclusively for your business.
What is the standard home office deduction?
The simplified method of calculating the deduction involves deducting $5 for every square foot you use for office space, up to 300 square feet. The regular method involves figuring out what percentage of your home the office space comprises and applying that percentage to all allowable home-related expenses. Use whichever method gives you a greater deduction.
What is the tax deduction for a home office?
The tax deduction for a home office depends on the size of your office and the expenses related to your home. The size of the deduction will be different for each taxpayer.
What can I claim if I work from home?
You can claim a percentage of expenses that are required to maintain your home, based on the size of your home office. These expenses are things like mortgage interest, Internet service, and utilities.
As long as you are following the law governing home office deductions, you can take full advantage of this option to reduce your taxes. You can claim quite a lot of space as a home office as long as that space doesn’t serve any other function at the same time.
"If you have a huge area that could be your office, I would try to leverage as much of it as possible for your business," says Frye.