Self-employed persons who work from home can often take a tax deduction for a percentage of their housing expenses. Your home office can be any part of your home that's used exclusively for your business on a regular basis. It can be a dedicated room, part of a room, or a separate structure.
The home office deduction reduces your net business income that's subject to income tax and to the self-employment tax, so you'll pay less in the way of these taxes.
Eligibility for the Home Office Deduction
You must use part of your residence exclusively and on a regular basis in at least one of the following ways to qualify to claim this deduction:
- It's the principal place of your trade or business.
- You meet or deal with your patients, clients, or customers here in the normal course of your trade or business.
- The space is used in connection with your trade or business if you're claiming the deduction for a separate structure that's not attached to the residence.
Definition of "Exclusive Use"
Exclusive use means that your home office area is used only for business purposes and never for personal purposes. It doesn't have to be demarcated by doors or enclosing walls, but you literally can't do anything else there other than work.
The IRS has said that you don't meet the exclusive use requirement if you use the area in question for personal and business and for personal purposes.
You might turn an extra, unused bedroom into your office, and that's fine. You can claim a deduction for that entire room if you don't do anything other than work there. Or you could place a desk, computer equipment, and filing cabinets in the corner of your own bedroom, and that's fine, too, but you can only deduct the square footage of the space where you work.
But there are two exceptions to this rule.
Exception #1: Storing Inventory
A storage area can be included in the calculation of the home office deduction without that space needing to meet the exclusive use test if you use part of your residence to store inventory or product samples for your business.
Your business must involve selling products at wholesale or retail, and the inventory or product samples are in your home because you use them in your business or trade. Your home must be the only fixed location of your trade or business, and you must use the storage space for business purposes on a regular basis. It must be a separately identifiable space that's suitable for this use.
This rule can be particularly helpful for taxpayers who sell merchandise by auction or on consignment, at flea markets or street festivals, and for other retailers or wholesalers who don't have a separate store or warehouse for storing inventory.
Exception #2: Day Care Facilities
You can use an area you use for daycare for personal reasons after work hours if you run this type of service out of your home. Daycare service providers are permitted to deduct home office expenses even if the area isn't used exclusively for business 24/7. But, again, there are rules.
You must be in the business of providing care for children, for elderly individuals age 65 or older, or for individuals who can't care for themselves due to physical or mental impairments. You must also be licensed, certified, registered, and approved as a daycare facility. You'll qualify if you're exempt from licensing requirements.
You won't meet this requirement if your application for licensure was rejected for some reason or it your license was revoked.
Daycare service providers calculate their business use percentage for the home office deduction in a dedicated section of Form 8829, Lines 4 through 7.
Definition of "Regular Use"
Regular use means that your home office area is used consistently for business purposes, not just sporadically or occasionally. But the IRS is a little vague when defining this rule. It simply advises, "You must consider all facts and circ*mstances in determining whether your use is on a regular basis."
You're covered if you always work from there, even if you perform services outside your home. You might repair appliances located in your customers' homes, but you'd pass this test if you always return to your home office to invoice those clients and otherwise see to the mechanics of running your business.
What Expenses Can Be Deducted?
Home office expenses are grouped into direct and indirect expenses. A direct expense is a cost related solely to your home office, and it can be deducted in full. This might include the cost of repairs to your home office area, or an alarm system that protects only this area of your house.
Indirect expenses are those that apply to your whole property. They benefit both the business-use area as well as personal-use areas. These expenses include rent, mortgage interest, utilities, property insurance, depreciation, and casualty losses.
Calculating the Home Office Deduction
The amount of your home office deduction is determined by figuring out the percentage of your home that your office space takes up. This percentage is used to determine how much of your indirect expenses can be deducted.
You can determine the business-use percentage of your home in one of two ways:
- Multiply the length of the area by the width to ascertain your business area, then divide this square footage by the total square footage of your home.
- Divide the number of rooms you've dedicated to business by the total number of rooms in your home. This might be suitable if all your rooms are much the same size.
You might use an extra bedroom regularly and exclusively as an office, and that room measures 10 feet by 15 feet for a total of 150 square feet. Your entire house measures 1,250 square feet. Your business use percentage would therefore be 150 divided by 1,250, or 12%.
You could deduct 12% of your indirect home office-related expenses in this case. You could additionally deduct 100% of any direct office-related expenses, such as repairing the drywall or repainting the office area.
Be sure to use only expenses for the period of time when the space was used as a home office when you're calculating your deduction, such as if the space was used for only part of the year.
Required Tax Forms
Homeowners must prorate their deductions between Schedule A of the Form 1040 tax return and their home office deduction. This applies to deductible expenses for mortgage interest, property tax, and casualty losses.
Self-employed persons can calculate their deduction and any limitations on it usingForm 8829, then enter the total on Schedule C.
Self-employed farmers and self-employed business partners calculate their home office deduction and any limitation on the deduction using the "Worksheet to Figure the Deduction for Business Use of Your Home"found inPublication 587.
The Simplified Method
The IRS has permitted the use of a simplified option for calculating the home office deduction since 2013. You can calculate your deduction at $5 per square foot using this method, multiplied by the area of your home office up to 300 square feet. The simplified method is therefore limited to a deduction of no more than $1,500 per year: $5 times 300 square feet.
Limitation on the Deduction
The home office deduction is limited to your tentative net income from your trade or business. This is your overall gross income from your trade or business, less your deductible costs and expenses of doing business, not including the home office deduction.
The home office deduction can reduce the net income of a business to zero, but not to less than zero. The home office can't be used to create a business loss or to increase a loss, but of the deduction over this limit can be carried forward to a subsequent tax year.
Keep Good Records
Documents pertaining to your home office deduction should be kept along with your copy of the tax return for at least six years. Relevant documentation can include:
- Measurements of the home office space and the total area of your home
- Proof of payment of rent, utilities, repairs, insurance and other expenses claimed as part of the home office deduction
- Documents showing that the home office area is used regularly and exclusively for business purposes
The Home Office Deduction for Employees
This deduction wasn't always limited to the self-employed. Employees used to be able to claim it under some strict circ*mstances, but that changed with 2018's Tax Cuts and Jobs Act (TCJA). It was an "unreimbursed employee expenses" miscellaneous itemized deduction for taxpayers who worked for someone else, and these itemized deductions were eliminated from the tax code under the TCJA.
But the IRS offers an exception to certain employees. You can still claim home office expenses while the TCJA is in effect through 2025 if you're an Armed Forces reservist, a qualifying performing artist, a state or local government official who's paid on a fee basis, or if you have work expenses related to an impairment. Speak with a tax professional to find out if you qualify.
