Home Office Deductions: Maximizing Your Tax Returns

The home office deduction is a tax break for self-employed people, gig workers, or independent contractors who use part of their home for business activities. It is not available for employees of a company that gives them a W-2 come tax season.

There are two ways to calculate the home office deduction: the simplified method and the regular method. The simplified method allows for a deduction of $5 per square foot of home office space, up to a maximum of $1,500 for a 300-square-foot space. The regular method is more complicated, requiring taxpayers to keep track of all their actual expenses.

Home office expenses for a sole proprietorship

If you're a sole proprietor, the IRS lets you deduct some business expenses related to your home office, as long as your office meets certain requirements.

Requirements

Your home office must meet an IRS requirement of "regular and exclusive use". You must regularly use the office in the normal course of your business, and you must not use the space for any other purpose. For example, an extra room or a specific identifiable area that you have set up as your office would typically qualify if you use this part of your home only for business. If the "office" also serves as a guest room, or if you set up your "desk" at your kitchen table, this would not qualify as "exclusive" use.

The second IRS requirement for a home office deduction is that your office must be a “principal place of business”. Your home office must be used for running your business or used for clerical activities, such as record-keeping, placing purchase orders and corresponding with clients. You can meet this requirement even if you have another office somewhere else, as long as you "also use your home substantially and regularly to conduct business".

Calculating office space

Your home office deduction is based on the percentage of your home that is actually used for your business. The most common way to do this is to calculate your office’s square footage and then divide this by your home’s total square footage. For example, if your office is 150 square feet and your home is 2,400 square feet, you may deduct 6.25% of the relevant expenses. Another acceptable calculation method, if all rooms in your house are approximately the same size, is to divide the number of rooms used for your home office by the total number of rooms in the house.

Business expenses

Business expenses for your home office are either direct or indirect. Direct expenses are fully deductible, up to set limits, and they include expenses that you incurred for the office itself. Indirect expenses are expenses you incur for maintaining and running the entire home, such as your rent or mortgage, phone service, and utilities. You use the percentage of home office space to calculate deductions based on indirect expenses. For example, if your home office takes up 6.25% of your home, and your mortgage payment is $2,500 a month, $156.25 is deductible.

How to claim

You must use IRS Form 8829, Expenses for Business Use of Your Home, to claim the deduction.

Home office expenses for a partnership

If you operate your business as a partnership, there are two ways to correctly deduct your home office expenses.

Deduct the cost as an unreimbursed partner expense (UPE)

As a partner in a partnership, you generally can't deduct any of the partnership expenses on your individual tax return—the partnership should pay for and deduct its own business expenses. However, if your partnership agreement or business policy forces you to pay for the expense out of pocket with no reimbursement available, then you can deduct the business expense in full on your individual tax return as a UPE.

To claim your UPE deduction:

• Find your deduction amount using Form 8829 (but don’t include it with your tax return).
• On a separate line on Schedule E, enter “UPE” in column (a) and the expense amount in column (i).
• Get reimbursement from your partnership via an accountable plan

The other option for realizing your home-office deduction is to have your partnership reimburse you for your home-office expenses under an accountable plan. When your partnership does this, the reimbursement is tax-free to you, the partner, and tax-deductible to the partnership, which reduces your share of the taxable net income from the partnership.

To obtain the reimbursement:

• Find the reimbursement amount using Form 8829 (including depreciation).
• Submit your reimbursement request with appropriate documentation within the time frames required by your partnership’s accountable plan policy.
• Receive a reimbursement check from your partnership.

Important note

The accountable plan regulations apply to employees, and partners aren't employees of their partnerships. But since tax law considers partners to be employees for purposes of working condition fringe benefits, reimbursements likely aren’t an issue for you as a partner.

Avoid these two land mines

You’ll end up with a tax bill instead of tax savings if you do one of the following two things to reimburse your home-office expenses:

• If you reimburse the amounts under a non-accountable plan (i.e., you don’t follow the rules in the linked article above), then you’ll pay both income tax and self-employment tax on the reimbursements, as the reimbursements are guaranteed payments to you.
• If the partnership pays rent to you, then you won’t be able to deduct any expenses against the rent, similar to the rules applicable to employees who receive rent from their employers.

Direct and indirect expenses

Indirect expenses are incurred by the whole house and are therefore only partially deductible. The amount you can deduct is calculated by multiplying the expense by the percentage of your home that is used for business purposes. For example, if your home office takes up 15% of your home's total square footage, you can deduct 15% of the cost of repairing your furnace, as it heats your entire home.

Some common indirect expenses include:

• Real estate property taxes
• Mortgage interest and insurance
• Rent
• Homeowners or renters insurance
• Depreciation of the part of your home used for business
• Utilities (electricity, gas, trash removal, and cleaning services)

It is important to note that not all indirect expenses can be included in the allocation. For example, utilities and services not used for business purposes, lawn care, and the first telephone line to the house must be excluded.

Common home office expenses

There are two methods for calculating the home office deduction: the simplified method and the regular method.

Simplified Method

The simplified method allows for a deduction of $5 per square foot of your home office, up to a maximum of $1,500 for 300 square feet. This method requires that the space is only used for your business and not for other purposes (e.g., it can't be a guest room with a desk in it). You must also be able to prove that you need an office for your work.

Regular Method

The regular method is more complicated, as it requires you to keep track of all your actual expenses. You can write off up to 100% of some expenses, such as the cost of repairs to the space. You can also deduct a portion of other expenses, including utilities, based on the size of your office relative to your home. For example, if your home office occupies 10% of your home, you can deduct that percentage from costs such as mortgage, rent, utilities, and some kinds of insurance.

• Mortgage interest
• Insurance
• Utilities
• Repairs
• Maintenance
• Depreciation
• Rent
• Real estate taxes
• Security system expenses
• Maid service
• Garbage disposal
• Decorating expenses

Simplified vs actual expense deduction

The simplified method for determining the home office deduction is an easier way to calculate the amount of expenses you can deduct for qualified business use of a home compared to the standard method. The simplified method multiplies the 'allowable square footage' of your home office by a 'prescribed rate' to determine the deduction amount. The allowable square footage is the lesser of the actual square footage of your home office or 300 square feet. The prescribed rate is currently $5 per square foot, with a maximum deduction of $1,500. This method simplifies the calculation and record-keeping requirements of the allowable deduction.

On the other hand, the actual expense method values your home office by measuring actual expenditures against your overall residence expenses. This method allows you to deduct direct and indirect expenses. Direct expenses, such as painting or repairs solely in the home office, can be deducted in full. Indirect expenses, including mortgage interest, insurance, utilities, real estate taxes, and general home repairs, are deductible based on the percentage of your home used for business.

When deciding between the simplified and actual expense methods, it's essential to consider which option will result in a larger tax deduction. While the simplified method offers convenience and simplicity, the actual expense method may provide greater tax savings, especially if your home office is large or you have high home-related expenses. Additionally, the actual expense method allows you to carry over unused deductions to future tax years, whereas the simplified method does not.

It's important to note that you must meet specific qualification requirements to claim any amount as a deduction, regardless of the method chosen. These requirements include exclusive and regular use of the home office space for business purposes, and it must be your principal place of business or used for face-to-face meetings with customers or clients.

Frequently asked questions