Claiming Home Office Tax Deductions

how to take home office off taxes

The home office deduction is a tax break for self-employed people who use part of their home for business activities. This includes freelancers and small-business owners. To qualify, you must use a portion of your home exclusively and regularly for your business. Your home office must be either the principal location of your business or a place where you regularly meet with customers or clients.

There are two methods for calculating the deduction: the simplified option and the standard/regular option. The simplified option multiplies the square footage of your home office by a prescribed rate, with a maximum of 300 square feet. The standard option requires more complicated calculations and record-keeping but could give you a larger deduction.

Characteristics Values
Who qualifies for the home office tax deduction? Self-employed people, freelancers, and small-business owners who work from home.
Who doesn't qualify for the home office tax deduction? W-2 employees working remotely for an employer.
Home office requirements The space must be used exclusively and regularly for business and be the principal place of business.
Exceptions to exclusive use Daycare facilities, inventory storage, and separate structures used exclusively and regularly for business.
Calculation methods Simplified method and actual expenses method.
Simplified method $5 per square foot, up to 300 square feet (maximum deduction of $1,500).
Actual expenses method Based on the percentage of the home devoted to business use, including direct and indirect expenses.

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Exclusive and regular use

To qualify for the home office tax deduction, you must meet the criteria for "exclusive and regular use". This means that you must use a portion of your home exclusively and regularly for your trade or business. This can include a room or another separately identifiable space, but it doesn't need to be marked off by a permanent partition. This space must not be used for any personal purposes and must not contain personal-use furnishings.

However, there are two exceptions to the exclusive-use rule. You don't need to meet this requirement if you use part of your home for the storage of inventory or product samples or if you run a qualified daycare facility at your home.

To meet the "regular use" requirement, you must use part of your home on a continuous, ongoing, or recurring basis. This means using the space for business on a continuing basis, not just for occasional or incidental purposes. For example, working a few hours each day or a couple of days a week from home would likely meet this criterion.

In addition to exclusive and regular use, to qualify for the home office deduction, your home office must also be your principal place of business. This means that it must be the place where you conduct administrative or management activities, such as billing customers, setting up appointments, and keeping records.

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Principal place of business

The IRS has two tests to determine if a taxpayer's home office is considered a principal place of business:

  • The relative importance of the activities carried out in the area.
  • The amount of time spent at each place where business is conducted.

If you have no other established site where you conduct business, your home office becomes your primary location.

Your home office can qualify as your principal place of business only if you meet the following IRS requirements:

  • You use it exclusively and regularly for administrative or management activities related to your trade or business. This means that the location at your home where you run your business is used exclusively and regularly for this purpose.
  • You have no other fixed location where you conduct substantial administrative or management activities for your trade or business. However, you may perform some administrative or management activities outside your home (e.g., in your car), or someone else may perform administrative work for you outside your home (e.g., a bookkeeper).

If you are an employee, additional requirements apply:

  • The home office must be used for the convenience of the employer, not the employee (it must be more than just "helpful").
  • You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.

If your home office is in a separate, unattached structure—for example, a detached garage converted into an office—you don't have to meet the principal place of business test. As long as you pass the exclusive and regular use tests, you can qualify for home business write-offs.

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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 allows you to receive a standard deduction of $5 per square foot for up to 300 square feet, with a maximum deduction of $1,500 per year. This method does not require you to fill out Form 8829, and you can instead use the worksheet in the Schedule C instructions. With this method, you cannot take a depreciation deduction on your home, but you also don't need to calculate depreciation when you sell your home for a profit.

Standard Method

The standard method, also known as the regular method, requires you to manually calculate the percentage of your home that you use for business. This method can be more complex and requires attentive record-keeping and calculations. You can use Form 8829 to see a comprehensive list of business expenses that can potentially qualify for the IRS home office tax deduction. With the standard method, you can simplify your home office use calculation to determine the percentage of the following that can be deducted for business use:

  • Mortgage (or rent) payment
  • Homeowners (or renters) insurance premiums
  • Utility payments
  • Indirect home-related expenses

Choosing the Right Method

The choice between the simplified and standard method depends on your specific situation. The standard method can result in a larger tax deduction, especially if you have a larger home office space or high home-related expenses. However, it requires more detailed record-keeping and calculations. On the other hand, the simplified method is straightforward and easier to calculate, but the deduction is capped at $1,500.

It is important to note that you can choose either method each tax year, regardless of which method was used in prior years. Additionally, you should consider the impact of your choice on your overall tax situation, including how it affects your residential property taxes claimed on Schedule A.

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Expenses that are deductible

There are two methods for calculating your home office deduction: the simplified method and the actual expenses method.

Simplified Method

With the simplified method, you are entitled to claim $5 per square foot of home office space, with a maximum of 300 square feet. This means the maximum deduction under this method is $1,500.

Actual Expenses Method

The actual expenses method is the more complicated of the two methods and requires you to keep detailed records of your expenses. You can deduct direct and indirect expenses. Direct expenses are those that apply only to your home office, such as painting or repairs in that specific area. You can deduct these expenses in full.

Indirect expenses are those that apply to your entire home, such as mortgage interest, insurance, utilities, and repairs. You can only deduct a portion of these expenses, based on the percentage of your home that your office occupies. For example, if your home office takes up 10% of your home, you can deduct 10% of your mortgage interest, insurance, utilities, and repairs.

Other expenses that can be deducted using the actual expenses method include:

  • Depreciation
  • Rent
  • Real estate taxes
  • Security system expenses
  • Maid service
  • Garbage disposal
  • Decorating expenses
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Requirements for claiming the deduction

To claim the home office deduction, you must meet the following requirements:

Exclusive and Regular Use

You must use a portion of your home exclusively and regularly for your business. This includes structures on your property, such as an unattached studio, barn, greenhouse, or garage. However, it does not include any part of your property used exclusively as a hotel, motel, inn, or similar business.

The exclusive-use rule means that the area must be used solely for business purposes and must not contain any personal-use furnishings. However, this rule does not apply if you use the space for daycare services, inventory storage, or product samples.

Regular use means that you must use the space continuously, ongoing, or on a recurring basis. There is no specific definition of what constitutes regular use, but using the space a few hours each day would likely qualify.

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. This requirement also applies if you conduct business outside of your home but use your home office for administrative or management activities.

If your home office is in a separate, unattached structure, you are exempt from meeting the principal place of business requirement as long as you pass the exclusive and regular use tests.

Calculation Method

You can choose between the simplified method and the actual expenses method to calculate your home office deduction.

The simplified method allows you to multiply the square footage of your home office by a prescribed rate, which is currently $5 per square foot for up to 300 square feet. The maximum deduction under this method is $1,500.

The actual expenses method involves calculating the percentage of your home used for business and then deducting a portion of your overall residence expenses, such as mortgage interest, taxes, maintenance, repairs, insurance, and utilities. You can use Form 8829 to figure out the expenses you can deduct.

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Frequently asked questions

Self-employed people can take the home office deduction, as can people with a side gig in addition to their W-2 job. However, employees working remotely for an employer are not eligible for the deduction.

You must use a portion of your home exclusively and regularly for your business. Your home office must also be your principal place of business, or a place where you meet with clients.

There are two methods: the simplified option and the regular/standard/actual expenses method. The simplified option multiplies the square footage of your home office by a prescribed rate (currently $5 per square foot, up to 300 square feet). The regular method calculates your deduction as a percentage of your total home expenses, based on the percentage of your home used for business.

Deductible expenses include mortgage interest, insurance, utilities, repairs, maintenance, depreciation, and rent.

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