Home Office Deduction: Claiming Tax Breaks

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. This includes people who work from home full time, those who have freelance side gigs, and those who were self-employed for a few months. The home office must be the principal place of business or a place where clients are met regularly. It must also be used exclusively and regularly for business.

There are two ways to calculate the deduction: the simplified method and the regular/standard method. The simplified method allows for a deduction of $5 per square foot of the home office, up to 300 square feet, with a maximum deduction of $1,500. The regular method involves tracking all home office expenses, including repairs and maintenance, and can result in a larger deduction.

It's important to note that wage employees who work from home are not eligible for the home office deduction, although some states do allow this tax deduction for employees.

Who can claim the home office deduction?

To be eligible for a home office deduction, you must be self-employed and use part of your home "regularly and exclusively for business. This means that the space you use for business cannot be used for any other purpose. For example, using a spare bedroom as both your office and a playroom for your children would make you ineligible.

There are two exceptions to this rule. The first is if you provide daycare services for children, older adults (65 or above), or handicapped individuals in that part of the house. In this case, you can still claim business deductions as long as you have a license, certification, or approval as a daycare center under state law. The second exception is if you use the office for storage of inventory or product samples that you sell in your business.

Your home office must also be your principal place of business, meaning that you use the space exclusively and regularly for administrative or management activities such as billing customers, setting up appointments, and keeping books and records. It doesn't have to be the only place where you do work, but there mustn't be another fixed location where you conduct substantial administrative or management activities for your trade or business.

If you are a W-2 employee, you are not eligible for a home office deduction on a federal level. However, some states, such as Pennsylvania and New York, allow employees to deduct some unreimbursed expenses.

How does the home office deduction work?

The home office deduction is a tax break for self-employed people who use part of their home for business activities. This includes people who work from home full time, those who have freelance side gigs (even if they also work for an employer), and those who were self-employed for a few months.

To qualify for the home office deduction, you must use part of your home "regularly and exclusively" for business. This means that the space you're using for business must be used exclusively for conducting business. It can be a dedicated nook in the corner of your basement, for example, but it can't be the kitchen table where your family eats.

There are two exceptions to the exclusive use rule. The first is if you provide daycare services for children, older adults (65 or above), or handicapped individuals in that part of the house. The second is if you use the office for storage of inventory or product samples that you sell in your business.

Your home office must also be your principal place of business. This means that you use the space exclusively and regularly for administrative or management activities, such as billing customers, setting up appointments, and keeping books and records.

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

With the simplified method, you can deduct $5 per square foot of your home office up to 300 square feet, giving the method a $1,500 cap. This home office needs to be used only for your business, and you must be able to prove that you need an office for your work.

The actual expenses method is a bit more complicated, as you must keep track of all your actual expenses. You can write off up to 100% of some expenses for your home office, 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 versus your home. For example, if your home office is 10% of your entire living space, you can deduct that much from the costs of mortgage, rent, utilities, and some kinds of insurance.

You can switch between the simplified and actual expenses methods year to year and should try to calculate both methods to see which will yield a larger deduction.

How do you calculate the home office deduction?

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

Simplified Method

The simplified method, introduced in 2013, is an easier way to determine the amount of expenses you can deduct for qualified business use of a home. You can use this method if you are self-employed or a wage employee with a side gig.

The simplified method allows you to deduct $5 per square foot, up to $1,500 or 300 square feet, per year for your exclusive home office space. If you use the space for less than a year, you can prorate the amount. This method does not allow you to deduct actual expenses related to the qualified business use of the home.

Regular Method

The regular method may result in a larger deduction but requires you to track all your home office expenses, including any costs for repairing and maintaining the space. You can also claim deductions for a portion of other expenses, such as rent, property taxes, home depreciation, and utilities, based on the proportion of your office space to the rest of your house.

For example, if your office is 250 square feet and your home is 1,000 square feet, you can deduct 25% of your allowable expenses. If you had $10,000 in eligible home-related expenses, you could claim up to $2,500 in deductions.

Other Considerations

• You must use the same method (simplified or regular) for all qualified business uses of the same home in a particular taxable year.
• You can switch between the simplified and regular methods from year to year.
• The home office deduction is determined each year, and your eligibility may change.
• If you use the simplified method for one year and the regular method for a subsequent year, you must calculate the depreciation deduction for the subsequent year using the appropriate optional depreciation table.
• The home office deduction is generally only available to those who are self-employed, gig workers, or independent contractors, not wage employees. However, some states may allow wage employees to take some deductions.

What other home office expenses are deductible?

If you're self-employed and working from home, you may be able to deduct other expenses for setting up your home office. Here are some examples:

• Furniture and equipment, including the cost of buying a computer, printer, modem, office desk and chair, file cabinets, and even lighting for Zoom calls.
• A dedicated phone line or internet connection for your business.
• Repairs and maintenance to the space.
• Utilities, including electricity, water, and gas.
• Mortgage interest or rent.
• Homeowner's insurance.
• Property taxes and depreciation.
• Cleaning and exterminator fees.

Can W-2 employees take the home office deduction?

The short answer is no. If you are a W-2 employee, you cannot claim a home office deduction on your federal tax return. This is because, in 2017, the Tax Cuts and Jobs Act eliminated the home office deduction for employees from 2018 to 2025.

However, if you have a side gig that you do from home, you may be able to deduct some unreimbursed expenses at the state level. For example, Pennsylvania and New York allow employees to deduct some unreimbursed expenses.

The home office deduction is a tax break that allows you to deduct expenses for the business use of your home. To qualify for the deduction, you must:

• Use the business part of your home exclusively and regularly for trade or business purposes.
• Have a main place of business, a place to meet patients, clients, or customers, or a separate structure not attached to your home that you use in connection with your trade or business.

There are two ways to calculate the home office deduction: the simplified method and the regular method.

Simplified Method

The simplified method allows you to deduct $5 per square foot of your home office, up to 300 square feet, for a maximum deduction of $1,500. This method requires that your home office be used only for business and cannot be a multi-purpose space.

Regular Method

The regular method involves tracking all your actual home office expenses, including repairs and maintenance. You can deduct a portion of other expenses, such as rent, property taxes, utilities, and home depreciation, based on the proportion of your home used for business. There is no limit on how much you can deduct using this method.

Frequently asked questions