
The home office deduction is a tax break for self-employed people who use part of their home for business activities. This deduction can be taken on Schedule C of Form 1040 (annual tax return). Small-business owners and freelancers who regularly and exclusively use part of their home for work and business-related activities may be able to write off rent, utilities, real estate taxes, repairs, maintenance and other related expenses.
There are two methods to calculate the home office tax deduction: the simplified method and the actual expenses method. The simplified method multiplies the square footage of your space by a prescribed rate, which is $5 per square foot for up to 300 square feet of space. The actual expenses method values your home office by measuring actual expenditures against your overall residence expenses.
Characteristics | Values |
---|---|
Who qualifies for the home office deduction? | Self-employed people, small-business owners, freelancers, and partners in a partnership |
Who doesn't qualify for the home office deduction? | Employees, people who work for an employer |
What is the simplified method? | A quick and easy way to determine your home office deduction; you multiply your office's total square footage by $5, with a maximum of 300 square feet and a maximum deduction of $1,500 |
What is the actual expenses method? | A regular, more difficult method that values your home office by measuring actual expenditures against your overall residence expenses |
What is exclusive use? | A portion of your home used exclusively for conducting your business regularly |
What is regular use? | There's no specific definition, but if you work in the home office a few hours each day, you might pass the test |
What is a principal place of business? | Your home office must be either the principal location of your business or a place where you regularly meet with customers or clients |
What is the home? | Includes a house, apartment, condominium, mobile home, boat, or similar property, as well as structures on the property such as an unattached garage, studio, barn, or greenhouse |
What expenses can you deduct? | Mortgage interest, insurance, utilities, repairs, maintenance, depreciation, rent, cable, and other qualified expenses |
What You'll Learn
Home office expenses that can be deducted
The home office deduction is a tax break for self-employed people who use part of their home for business activities. Small-business owners and freelancers who regularly and exclusively use part of their home for work and business-related activities may be able to deduct the following expenses:
- Rent
- Utilities
- Real estate taxes
- Repairs
- Maintenance
- Mortgage interest
- Insurance
- Depreciation
- Security system expenses
- Maid service
- Garbage disposal
- Decorating expenses
The IRS provides two methods for calculating the home office deduction: the simplified method and the actual expenses method.
Simplified Method
With the simplified method, you don't need to worry about classifying or allocating expenses. Instead, you multiply the square footage of your home office space by a prescribed rate. The rate is $5 per square foot for up to 300 square feet of space, with a maximum deduction of $1,500.
Actual Expenses Method
The actual expenses method is more complicated and involves measuring actual expenditures against your overall residence expenses. You can deduct direct expenses, such as painting or repairs done solely in the home office, in full. Indirect expenses, such as mortgage interest, insurance, utilities, real estate taxes, and general home repairs, are deductible based on the percentage of your home used for business.
It's important to note that employees who work remotely for an employer are not eligible for the home office deduction. Only self-employed individuals or those with a side business can take advantage of this tax break. Additionally, the space used for business must be exclusively for that purpose and cannot be used for any other personal activities.
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Who qualifies for the home office deduction
To qualify for the home office tax deduction, you must meet the following criteria:
Self-employed
You must be self-employed, a sole proprietor, a freelancer, or an independent contractor.
Exclusive and regular use
The space you use for your home office must be used exclusively and regularly for business purposes. This means that the space cannot be used for any personal activities, and it must be used continuously, not just a few times a year.
Principal place of business
Your home office must be your primary place of business, meaning it is where you conduct administrative or management activities such as billing customers, setting up appointments, and keeping records. If you have another fixed location where you conduct a substantial amount of administrative or management activities, you will not qualify for the deduction.
Daycare or storage exception
The exclusive-use rule does not apply if you use part of your home to provide daycare services or to store inventory or product samples for your business.
Direct and indirect expenses
You can deduct direct expenses, such as repairs made solely to your home office, in full. Indirect expenses, such as mortgage interest, insurance, and utilities, can be deducted based on the percentage of your home used for business.
State-specific rules
Even if you don't qualify for the federal home office deduction, some states may allow you to deduct some unreimbursed expenses. Check your state's rules to see if you qualify.
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How to calculate the home office tax deduction
To calculate the home office tax deduction, you can use one of two methods: the simplified method or the actual expenses method.
The Simplified Method
The simplified method is a more straightforward way to calculate your home office tax deduction. With this method, you multiply the square footage of your home office space by a prescribed rate. The rate is $5 per square foot for up to 300 square feet of space. So, for example, if your home office measures 150 square feet, your deduction would be $750 (150 x $5). This method is available for spaces of 300 square feet or less.
The Actual Expenses Method
The actual expenses method is the more complex of the two methods. It involves measuring your actual expenditures against your overall residence expenses. You can deduct direct expenses, such as painting or repairs done solely in the home office, in full. Indirect expenses, such as mortgage interest, insurance, utilities, real estate taxes, and general home repairs, are deductible based on the percentage of your home used for business.
For example, let's say you paid $3,000 in mortgage interest, $1,000 in insurance, and $3,000 in utilities (all indirect expenses), plus $500 on a home office paint job (a direct expense) during the year. If your home office takes up 300 square feet in a 2,000-square-foot home, you may be able to deduct indirect expenses on 15% of your home. This would amount to a deduction of $1,050 in indirect expenses ($7,000 in expenses multiplied by the 15% of space used in the home) plus $500 for the direct expense of painting, for a total deduction of $1,550.
Other Considerations
When deciding which method to use, the main factor to consider is which method will result in a larger tax deduction for you. Additionally, keep in mind that if you are a homeowner and you take the home office deduction using the actual expenses method, it could impact your ability to avoid capital gains tax on home sales.
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Simplified vs. actual expense deduction
The simplified method for determining the home office deduction was introduced by the IRS in 2013 to simplify the calculation and record-keeping requirements of the allowable deduction. This method is beneficial for those who find the standard method too complex and burdensome.
Simplified Method
The simplified method offers a standard deduction of $5 per square foot of the home used for business purposes, with a maximum of 300 square feet. This method is straightforward and arguably easier, and it is also more popular. The simplified method does not require taxpayers to worry about calculating depreciation when selling their homes for a profit. However, the simplified method has a cap of $1,500, and homeowners cannot claim a depreciation deduction for their home office.
Standard Method
The standard method, also known as the regular method, requires manually calculating the percentage of the home used for business. This method can be more complex and involves attentive record-keeping and calculations. Taxpayers must complete Form 8829, which includes 43 lines, to determine the allowable deduction. The standard method can result in a larger tax deduction, especially for those with larger homes or high expenses. It allows for the deduction of a wider range of expenses, including mortgage or rent payments, insurance premiums, utility payments, and repairs and improvements to the home office.
Choosing the Right Method
When deciding between the simplified and standard methods, it is important to consider the specific circumstances and overall tax situation. The simplified method may be preferred for those with smaller home offices or those who want a simpler calculation process. On the other hand, the standard method may be more advantageous for those with higher expenses or those seeking a potentially larger deduction. It is worth noting that the chosen method can impact the amount of residential property taxes claimed on Schedule A. Additionally, the standard method allows for carrying over excess deductions to the next year, which is not possible with the simplified method.
Taxpayers can choose between the simplified and standard methods each year, based on their specific circumstances and tax situation. It is recommended to calculate the deduction using both methods and select the one that results in the largest deduction. Consulting a tax professional or using expense-tracking software can also help in making an informed decision.
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Other home office deduction rules and considerations
If you plan on deducting actual expenses, keep detailed records of all the business expenses you think you’ll deduct, such as receipts for equipment purchases, electric bills, utility bills and repairs. If you’re ever audited by the IRS, you’ll be prepared to back up your claims.
If you’re a homeowner and you take the home office deduction using the actual expenses method, it could cancel out your ability to avoid capital gains tax on home sales. People who sell their primary residence after having lived in it for at least two of the five years before the sale generally don't have to pay taxes on up to $250,000 in profit on the sale, or $500,000 if married filing jointly.
If you use the actual expenses method, you’re required to depreciate the value of your home. Depreciation refers to an income tax deduction that lets taxpayers recover the costs of property due to wear and tear, deterioration, or obsolescence of the property. The depreciation you’re required to take in home office deductions is subject to capital gains tax when you sell your home. For example, if you own your home, use 20% of it as a home office and deduct depreciation, 20% of your profit on the home’s sale may be subject to capital gains tax. However, if you use the simplified method, depreciation isn't a factor and you may not be subject to the tax.
The rules on tax deductions for a home office can be hard to digest. Consider consulting with a tax advisor or consultant or using the appropriate online tax software if you're unsure about how to proceed.
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Frequently asked questions
Self-employed people or partners in a partnership are eligible for the home office deduction. Employees working remotely for an employer are not eligible.
You must use a portion of your home exclusively and regularly for conducting your business. Your home office must also be your principal place of business, or a place where you meet with clients or patients.
There are two methods: the simplified option and the regular/standard method. The simplified option allows you to multiply your office's square footage by $5, with a maximum of $1,500. The regular method is based on the percentage of your home devoted to business use, and allows you to claim a wider range of home-related expenses.
If you're self-employed, you may be able to deduct expenses for setting up your home office, such as furniture, equipment, a dedicated phone line, and a separate internet connection.