Can I Get a Tax Deduction For My Home Office?
In recent years, the option to work from home has gone from being a perk for some employees to a benefit that tops the list of nonnegotiables for many job candidates. Analysis of U.S. Bureau of Labor Statistics data reveals that the number of people working from home has increased by 159% since 2005, and 3.4% of the U.S. workforce is fully remote, up from 2.9% just five years ago.
Working from home offers a range of benefits, including the option to deduct home office expenses from federal income taxes. Unlike some other business expenses, though, the home office deduction rules are complex, and you may not be able to deduct as much as you expect — or anything at all.
Table of Contents
Who Can Deduct Home Office Expenses?
Telecommuting or running a business out of your home does not automatically mean you can deduct home office expenses from your taxes. Under IRS rules, your office must meet two strict criteria to qualify: The space must be used regularly and exclusively for the business, and it must be the principal place of business.
Perhaps the most important point to remember is that you only qualify for the home office deduction if you own a business or are an independent contractor and work from home. If you are an employee and work from home several days a week, or even full time, you cannot deduct home office expenses, even if you dedicate a space in your home exclusively for work. The deduction requires meeting both criteria, and as a telecommuter, your home does not meet the principal place of business test, so you may not take the deduction.
If you are not an employee, though, and are self-employed, you may be able to take the deduction if you meet both of the criteria.
Regular and Exclusive Use
To be considered a home office, the space must be used regularly and exclusively for business purposes. Under IRS rules, this means that the space can only be used for business or trade purposes, and nothing else. If you use the space for personal purposes as well, then you cannot take the deduction.
That said, if you have a defined portion of the room that is used only for business, you may be able to make a deduction for that space, even if there isn’t a fixed or permanent barrier between the business and personal spaces.
For example, you are a freelance graphic designer, and you work at a desk in your dining room, where your family eats meals each day. You cannot take the home office deduction, because the room is not exclusively used for business. However, if you convert the dining room into your home office and only use it for business, and your family eats meals elsewhere, then it counts as an office.
Alternatively, if you designate a specific portion of your dining room for exclusive use of your business (for example, you dedicate a corner of the room to your desk and materials) you may be able to deduct the use of that percentage of the room from your taxes.
The exceptions to the regular and exclusive use test are if you store inventory for your business at your home, or if you own a home daycare. Space used for the storage of inventory or samples is exempt from the exclusive use rule if your home is the only fixed location of your business. For example, if you operate a business in which you sell products to retailers, and store inventory in a shed or your basement, then that space is deductible.
The IRS also requires that any space be used regularly to qualify for the deduction. You’ll be required to use your best judgment to determine whether use is regular, as the IRS does not outline any specific guidelines, beyond noting that occasional or incidental use does not qualify.
Principal Place of Business
The second criteria for the home office tax deduction is that it must be the principal place of business. The IRS considers your home office your principal place of business if your business does not have any other fixed locations where business activities take place, and if you regularly conduct administrative and managerial tasks in the space.
This doesn’t mean that you are prohibited from taking the deduction if you do business elsewhere; for example, working in a hotel room while traveling, or working with clients in their homes. As long as you conduct important activities, such as setting appointments, maintaining records, and accounting functions, in the space the majority of the time, it counts as your principal place of business.
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) of 2017 did make some significant changes to the home office expense deduction for tax years 2018 to 2025. Prior to 2018, employees could take the deduction for their home offices if they worked at home for someone else. The TCJA changed that rule, making the deduction applicable to self-employed individuals only.
The TCJA also changed how taxpayers claim the deduction on their tax returns. Prior to the tax reform, the deduction could be taken as a miscellaneous deduction on Schedule A on Form 1040. Now, self-employed individuals must claim the deduction using Schedule C, and fill out Form 8829, Expenses for the Business Use of Your Home.
Qualified Home Office Expenses
The IRS specifies that the home office expense deduction is for expenses related to the space itself and upkeep. It does not include the equipment and tools used for your business operations, such as furniture or computers, as those expenses are deducted elsewhere.
Qualified home expenses fall into two categories, direct and indirect. Direct expenses are those expenses associated with the specific office. For example, if you paint, put in new carpet, or replace a window in the office, those expenses are deductible direct expenses.
Indirect expenses are those associated with the general running and upkeep of your home, that also benefit your home office. These include:
- Utilities (e.g., heat and electricity);
- General repairs (a new roof, for instance);
- Security system;
- Depreciation of your home’s value;
- Losses not related to a federally-declared disaster;
- Mortgage insurance premiums.
Keep in mind that you cannot deduct the entire cost of these expenses from your taxes. Rather, your deduction is limited to the percentage of your home used for business. In other words, if you use 10% of your home’s space for business, you may deduct 10% of these indirect and direct expenses on your tax return. Any expenses incurred that are not related to the part of your home used for business (such as yard care or renovations to other portions of your home) cannot be deducted.
How to Deduct Home Office Expenses
If you qualify for the home office expense deduction, you have two options for claiming it on your tax return: the simplified or regular method.
With the simplified method, you calculate the number of square feet of space dedicated to your home office and multiply that number by $5 to determine your standard deduction. You may claim up to 300 square feet, for a maximum standard deduction of $1,500. You cannot claim any other deductions.
For the regular method, you must maintain records of your home office expenses, including mortgage statements and utility bills, and calculate your deduction based on the percentage of your home used for business.
Regardless of which method you choose, keeping meticulous records is a must. In the event you are audited, you’ll need to prove that your home office meets the deduction criteria. This might include sending photographs of the space or allowing an auditor into your home to inspect the space. Be prepared to prove that you use the space exclusively for your business and no personal activities to avoid getting into hot water with the IRS.
Image Source: https://depositphotos.com/