Claiming Home Office Tax Write-Offs: A Guide

The home office tax deduction is a tax break for self-employed people who use part of their home for business activities. It allows qualified taxpayers to deduct certain home expenses when they file their taxes. This includes renters as well as homeowners.

To claim the home office deduction, taxpayers must exclusively and regularly use part of their home or a separate structure on their property as their primary place of business. Expenses that can be deducted include mortgage interest, insurance, utilities, repairs, maintenance, depreciation, and rent.

There are two methods for calculating the home office tax deduction: the simplified option and the regular method. The simplified option allows for a deduction of $5 per square foot for business use of the home, up to a maximum of $1,500 for 300 square feet. The regular method is based on the percentage of the home devoted to business use, allowing for deductions of both direct and indirect expenses.

Exclusive and regular use

To claim a home office tax write-off, you must meet the 'exclusive and regular use' requirement. This means that you must use a portion of your home exclusively and regularly for business purposes. This can include a house, apartment, condominium, mobile home, boat, or similar structure. The space must be used solely for trade or business purposes and cannot be used for any personal purposes. It also cannot contain any personal-use furnishings.

There are two exceptions to the exclusive-use requirement. The first is if you use part of your home for the storage of inventory or product samples, and your home is the only fixed location of your business. The second exception is if you use part of your home as a daycare facility for people who are physically or mentally unable to care for themselves or for individuals aged 65 or older. In this case, you must meet or be exempt from all state licensing or certification requirements.

In addition to exclusive use, you must also meet the regular use requirement. This means that you must use the space on a continuous, ongoing, or recurring basis. It cannot be used only occasionally or incidentally. If you are an employee of another company, but also have your own part-time business based in your home, you can still meet the regular use requirement.

Principal place of business

To claim a home office tax write-off, your home office must be your principal place of business. This means that you spend the most time and conduct important business activities at home.

If you use your home office to conduct administrative or management activities, such as billing customers, setting up appointments, and keeping books and records, you can claim it as your principal place of business. This is true even if you conduct business outside of your home, as long as you don't perform these specific duties at any other fixed location.

To qualify for the home office deduction, you must also meet the requirements of regular and exclusive use. This means that you must use your home office space regularly and exclusively for conducting business activities. For example, if you use your dining room table as your workspace, you cannot claim the home office deduction. However, if you have a separate room or area dedicated solely to your business, you may be eligible for the deduction.

The size of your deduction will depend on the percentage of your home that is used for business. You can calculate this by dividing the square footage of your home office by the total square footage of your home, or by dividing the number of rooms used for business by the total number of rooms, if they are all similar in size.

It's important to note that employees who work remotely are not eligible for the home office tax deduction. This deduction is only available to self-employed individuals or small business owners who meet the criteria.

Simplified vs. actual expense deduction

The simplified method for determining the home office deduction was introduced in 2013 as an easier way to calculate the amount of expenses you can deduct for qualified business use of your home. This method simplifies the calculation and record-keeping requirements of the allowable deduction.

Simplified Method

With the simplified method, you aren't deducting actual expenses. Instead, the square footage of your home office is multiplied 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. This method is suitable for single-room offices and small operations.

Actual Expenses Method

The actual expenses method, also known as the regular method, values your home office by measuring actual expenditures against your overall residence expenses. You can deduct direct expenses, such as painting or repairs solely in the home office, in full. Indirect expenses, such as mortgage interest, insurance, home utilities, real estate taxes, and general home repairs, are deductible based on the percentage of your home used for business. This method might be more suitable if the business makes up a large part of your home.

The choice between the simplified and actual expenses methods depends mainly on which would result in a larger tax deduction. The actual expenses method usually leads to bigger tax savings, even for taxpayers with lower housing costs and more room to work with. However, the simplified method can be more convenient, especially if you have a small home office and don't want to deal with the record-keeping requirements of the actual expenses method.

Deductible expenses

There are two methods to calculate your home office tax deduction: the simplified method and the actual expenses method.

Simplified Method

The simplified method multiplies 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. The maximum deduction under this method is $1,500.

Actual Expenses Method

The actual expenses method is more complex and values your home office by measuring actual expenditures against your overall residence expenses. You can deduct direct expenses, such as painting or repairs, in full. Indirect expenses, such as mortgage interest, insurance, utilities, and real estate taxes, are deductible based on the percentage of your home used for business.

The following expenses may be deductible:

• Mortgage interest
• Insurance
• Utilities
• Repairs and maintenance
• Depreciation
• Rent
• Real estate taxes

Requirements for employees with a side business

If you are an employee with a W-2 and also have a side business or a "side hustle", you may be able to claim a home office tax deduction for your secondary work. However, there are a few important points to keep in mind:

• Exclusive and Regular Use: The portion of your home that you use for your side business must be used exclusively and regularly for business activities. This means that you cannot use the same space for both your employment and your side business. The space should be used solely for business purposes and should not be used for any personal activities.
• Principal Place of Business: Your home office must be the principal location of your side business. This means that it should be the primary place where you conduct administrative, management, or business-related activities. If you have another fixed location where you conduct these activities, you may not be eligible for the deduction.
• Business Qualifications: Your side business must qualify as a business for tax purposes. This means that it should involve substantial activities in terms of time, effort, and income generation. Simply managing your personal investments or portfolio does not qualify as a business.
• Calculating Deductions: If you qualify for the home office tax deduction, you can calculate your deductions using either the simplified method or the actual expenses method. The simplified method uses a prescribed rate of $5 per square foot for up to 300 square feet. The actual expenses method involves calculating the percentage of your home used for business and deducting a corresponding portion of your overall residence expenses.
• Record-Keeping: If you plan to claim the home office tax deduction, it is important to maintain detailed records of your business expenses. This includes receipts for equipment purchases, utility bills, repairs, and any other relevant expenses. These records will be crucial if you are ever audited by the IRS.
• State-Specific Rules: It is important to note that some states may have different rules and allowances for employees claiming a home office tax deduction. Be sure to check the specific regulations for your state to understand your eligibility.

Frequently asked questions