Home Office Tax Write-Off: What's Allowed?

The home office tax write-off is a tax break for self-employed people who use part of their home for business activities. To qualify for the deduction, you must be self-employed or a partner in a business and use a portion of your home exclusively for conducting your business regularly. The space used for business must be your principal place of business, and you must meet specific requirements set by the IRS. 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, while the actual expenses method measures actual expenditures against your overall residence expenses.

Calculating the percentage of your home used for business

There are two methods to calculate the percentage of your home used for business: the simplified method and the actual expenses method.

Simplified Method

The simplified method allows you to multiply the square footage of your home office by a prescribed rate. The rate is $5 per square foot for up to 300 square feet of space. This method is available for tax year 2013 and beyond.

For example, if your home office is 150 square feet, the business percentage of your home would be 12.5% (150/12000*100).

Actual Expenses Method

The actual expenses method is more complex and requires measuring actual expenditures against your overall residence expenses. You can deduct mortgage interest, taxes, maintenance and repairs, insurance, utilities, and other expenses.

For example, let's say you have a 2,000-square-foot home and your home office takes up 300 square feet. You pay $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 (direct expense) during the year.

First, calculate the business use percentage of your home: 300/2000*100 = 15%.

Next, calculate the indirect expenses deduction: $7,000 in expenses multiplied by the 15% of space used in the home = $1,050.

Then, add the direct expense of painting the home office: $1,050 + $500 = $1,550 total deduction.

You can use Form 8829 to figure out the expenses you can deduct.

The simplified method

• Standard Deduction: The deduction is calculated at a standard rate of $5 per square foot of your home used for business purposes, up to a maximum of 300 square feet. This means the maximum deduction you can claim using this method is $1,500 (for a 300-square-foot space).
• Home-Related Itemized Deductions: You can claim allowable home-related itemized deductions in full on Schedule A, such as mortgage interest and real estate taxes.
• No Depreciation Deduction: When using the simplified method, you cannot claim a depreciation deduction for the portion of your home used for business. This also means there is no recapture of depreciation when you sell your home.

It's important to note that the simplified method does not change the criteria for who may claim a home office deduction. To qualify for the home office deduction, your home office must generally be the principal location of your business or a place where you regularly meet with customers or clients. Additionally, you must use the space exclusively and regularly for business purposes.

When deciding whether to use the simplified method or the actual expenses method, consider which option will provide you with the biggest tax deduction. The simplified method may be more straightforward, especially for single-room offices and small operations. However, if your business makes up a large part of your home, the actual expenses method might result in a larger deduction.

The actual expenses method

This method requires you to measure the square footage of your home office as a percentage of your home's total area. For example, if your home office is 150 square feet and your home is 1,200 square feet, your business percentage is 12.5%.

You can then 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, can be deducted based on the percentage of your home used for business.

For instance, if you paid $3,000 in mortgage interest, $1,000 in insurance, and $3,000 in utilities (all indirect expenses), and $500 on a home office paint job (a direct expense) during the year, and your home office takes up 15% of your home, you may be able to deduct $1,050 in indirect expenses ($7,000 in expenses multiplied by 15%) plus $500 for the direct expense, for a total deduction of $1,550.

You can use Form 8829 to figure out the expenses you can deduct.

Home office requirements

To qualify for the home office tax deduction, you must meet the following requirements:

Regular and Exclusive Use

The space you’re using for business must be used exclusively for conducting business. For example, using a spare bedroom as both your office and a playroom for your children probably makes you ineligible. There are two exceptions to this rule:

• If you provide daycare services for children, older adults (65 or above), or handicapped individuals in that part of the house, you can probably still claim business deductions as long as you have a license, certification, or approval as a daycare center under state law.
• The other exception is if you use the office for storing inventory or product samples that you sell in your business.

Principal Place of Business

Your home office must be your principal place of business. That means you use the space exclusively and regularly for administrative or management activities, such as billing customers, setting up appointments, and keeping books and records. Although your home office doesn’t have to be the only place you meet your clients or customers, it must be your primary location for conducting business.

Common mistakes when claiming the deduction

There are several common mistakes to avoid when claiming the home office deduction. Here are some key points to keep in mind:

• Exclusive Use: The space must be used exclusively for work or business purposes. Personal use of the space may disqualify you from the deduction. For example, using a spare bedroom as an office and a playroom for your children may make you ineligible. However, there are exceptions for daycare facilities and storage of inventory or product samples.
• Regular Use: The space must be used regularly and continuously for business purposes. Incidental or occasional use is not sufficient.
• Principal Place of Business: Your home office must be your primary place of business, or a place where you regularly meet with customers or clients. If you have another fixed location where you conduct substantial business activities, you may not be eligible for the deduction.
• Administrative or Management Tasks: If you are claiming the deduction for administrative or management tasks, ensure that these tasks are essential to your job and that there are no other suitable locations to perform them.
• Record-Keeping: Keep accurate and detailed records of all home office expenses. This includes receipts for equipment, utility bills, repairs, and other related expenses.
• Overestimating the Deduction: Be careful not to overestimate the amount of the deduction, as this may trigger an audit by the IRS.
• Seek Professional Advice: Consult a tax professional or advisor to ensure that you meet all the requirements and claim the deduction correctly.

Frequently asked questions