Home Office Rent: Write It Off

If you're self-employed and work from home, you may be able to write off your home office expenses, including rent, utilities, real estate taxes, repairs, and maintenance. This is known as the home office tax deduction. To qualify, you must use part of your home regularly and exclusively for business. This means that you can't use your home office for any other purpose, and you must work from home on a regular basis. The home office deduction can be claimed on Schedule C of Form 1040 (annual tax return).

There are two methods for calculating the home office deduction: the simplified method and the actual expenses method. The simplified method allows you to deduct $5 per square foot of your home office, up to a maximum of $1,500 for a 300-square-foot space. The actual expenses method involves calculating the percentage of your home that is used for business and deducting that percentage of your total expenses, such as rent, utilities, and insurance.

Home office deduction checklist

Eligibility

• You must be self-employed or a business owner. Employees do not qualify for this deduction.
• You must use a portion of your home for your business on a regular basis.
• Your home office must be your principal place of business, or a place where you regularly meet with customers or clients.
• You must use your home office exclusively for business purposes.
• You must work from your home office on a regular basis.

Calculating Your Deduction

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

Simplified Method

• This method is optional and is available if your home office is 300 square feet or less.
• You can deduct $5 for every square foot of your home office, up to a maximum of $1,500.
• You do not need to keep records of specific expenses with this method.

Regular/Standard Method

• This method involves deducting a portion of your rent or mortgage interest, utilities, and other home expenses based on the percentage of your home that your office space represents.
• You will need to fill out Form 8829 to calculate your total deduction.
• This method may result in a larger deduction but requires more complicated calculations and record-keeping.

Other Considerations

• You can choose a different method each tax year.
• You can deduct other home office expenses such as furniture, equipment, and internet costs.
• If your home office expenses are more than your business income for the year, your deduction may be limited.

Home office requirements for tax purposes

To qualify for the home office deduction, you must meet three threshold requirements:

• You must be in business
• You must use part of your home only for business (unless you store inventory at home or run a daycare center)
• You must use your home office for business on a regular basis

You must meet all three threshold requirements and any one of the following:

• Your home office is your principal place of business
• You regularly and exclusively use your home office for business activities, including managerial or administrative work
• You meet clients or customers at home
• You use a separate structure on your property only for business purposes
• You store inventory or product samples at home
• You run a daycare center at home

Exclusive and Regular Use

The biggest roadblock to qualifying for these deductions is that you must use a portion of your home exclusively and regularly for your business. The law is clear and the IRS is serious about the exclusive-use requirement. If you let your children use the office to do their homework, you violate the exclusive-use requirement and forfeit the chance for home office deductions.

The exclusive-use rule doesn't mean you're forbidden to make a personal phone call from the office, or that you have to rush outside whenever a family member needs a moment of your time. Although individual IRS auditors may be more or less strict on this point, some advisers say you meet the spirit of the exclusive-use test as long as personal activities invade the home office no more than they would be permitted to in an office building.

Regular Use

There's no specific definition of what constitutes regular use. Clearly, if you use an otherwise empty room only occasionally and its use is incidental to your business, you'd fail this test. If you work in the home office a few hours or so each day, however, you might pass. This test is applied to the facts and circumstances of each case the IRS challenges.

Principal Place of Business

In addition to passing the exclusive- and regular-use tests, your home office must be either the principal location of that business or a place for regular customer or client meetings.

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

Calculating Your Deduction

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

Simplified Method

With the simplified option, you aren’t deducting actual expenses. Instead, the square footage of your space 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.

Actual Expenses Method

The regular, more difficult method values your home office by measuring actual expenditures against your overall residence expenses. You can deduct mortgage interest, taxes, maintenance and repairs, insurance, utilities and other expenses. You can use Form 8829 to figure out the expenses you can deduct.

Calculating the home office deduction

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

The Simplified Method

The simplified method is an easier way to determine the amount of expenses you can deduct for qualified business use of a home. The standard rate of $5 per square foot can be multiplied by the area of your home office, up to a maximum of 300 square feet. This method is available for taxable years beginning on or after January 1, 2013.

The Actual Expenses Method

The regular method values your home office by measuring actual expenditures against your overall residence expenses. You can deduct mortgage interest, taxes, maintenance and repairs, insurance, utilities, and other expenses. 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 on which would net you the bigger tax deduction. The simplified method can work well for single-room offices and small operations.

Other Considerations

• Receipts: If you plan on deducting actual expenses, keep detailed records of all the business expenses you think you'll deduct, such as equipment purchases, electric bills, utility bills, and repairs.
• Home Sales: 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.
• Depreciation: If you use the actual expenses method, you're required to depreciate the value of your home. The depreciation you're required to take in home office deductions is subject to capital gains tax when you sell your home. 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 complex, and it's recommended to consult a tax advisor or use appropriate online tax software if you're unsure about how to proceed.

Home office tax deduction for employees

The home office tax deduction is a tax break that allows self-employed people who use part of their home for business activities to write off expenses such as rent, utilities, real estate taxes, repairs, and maintenance. This deduction can be claimed on Schedule C of Form 1040 (annual tax return).

Eligibility Requirements:

To be eligible for the home office tax deduction, employees must meet the following criteria:

• Exclusive and Regular Use: The space used for business must be exclusively and regularly used for conducting business. It cannot be used for any other purpose, such as a playroom for children. However, there are exceptions for day care services and inventory storage.
• Principal Place of Business: The home office must be the principal location of the business or a place where the employee regularly meets with customers or clients. This requirement is waived if the home office is in a separate, unattached structure.

Calculating the Deduction:

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

• Simplified Method: This method is simpler and involves multiplying the square footage of the home office space 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.
• Actual Expenses Method: This method involves measuring actual expenditures against overall residence expenses. Employees can deduct a portion of their rent, mortgage interest, taxes, maintenance, repairs, insurance, utilities, and other expenses based on the percentage of their home used for business.

Record-Keeping:

It is important to maintain thorough records and save receipts for any expenses claimed as deductions. The IRS recommends keeping a written record or logbook and proof of payment in the form of credit card statements, bank statements, canceled checks, or itemized receipts. Digital records are also acceptable as long as they can be retrieved when needed.

State-Specific Deductions:

While federal tax laws do not allow employees to claim the home office tax deduction, some states may still allow this deduction for employees. It is important to check the specific rules and regulations for your state.

Other home office expenses

There are a variety of other expenses that can be claimed as deductions for a home office. These include:

• Utilities (electricity, heat, water, internet access fees)
• Maintenance and repair costs
• Insurance
• Mortgage interest
• Real estate taxes
• Depreciation
• Casualty losses

It is important to note that these expenses must be calculated based on the percentage of the home used for business activities. Direct expenses, such as painting or repairs solely in the home office, can be deducted in full. Indirect expenses, such as mortgage interest, insurance, and utilities, are deductible based on the percentage of the home devoted to business use.

For example, if your home office takes up 300 square feet in a 2,000-square-foot home, you may be eligible to deduct indirect expenses on 15% of your home. This would include expenses such as mortgage interest, insurance, and utilities. Direct expenses, such as a home office paint job, can be deducted in full.

Frequently asked questions