Home Office: Depreciation Deduction Changes

The home office deduction is a tax break for self-employed people who use part of their home for business activities. This deduction can be taken on Schedule C of Form 1040 (annual tax return).

The home office deduction is not new this year. It has been around for a while, but the rules have changed over time. For example, prior to the Tax Cuts and Jobs Act of 2017, employees could deduct unreimbursed home office expenses as itemized deductions, but the Act suspended this tax break until 2025.

To qualify for the home office deduction, you must meet certain criteria. Your home office must be used exclusively and regularly for conducting business and it must be your principal place of business. There are some exceptions to these rules, such as if you provide daycare services or store product samples or inventory in your home.

You can calculate the home office deduction using either the simplified method or the actual expenses method. The simplified method allows you to claim a standard deduction of $5 per square foot of home used for business, up to a maximum of $1,500 for a 300-square-foot space. The actual expenses method involves measuring the percentage of your home used for business and deducting a portion of your home-related expenses, such as mortgage interest, taxes, repairs, and utilities.

The choice between the simplified and actual expenses methods depends on which would result in a larger tax deduction. The simplified method may be easier, but the actual expenses method might provide a bigger deduction, especially if the business makes up a large part of the home.

What is the home office tax deduction?

The home office tax deduction is a tax break for self-employed people who use part of their home for business activities. This deduction can be taken on Schedule C of Form 1040 (annual tax return).

To qualify for the home office tax deduction, you must meet the following criteria:

• Regular and exclusive use: The space you're using for business must be used exclusively for conducting business.
• Principal place of business: Your home office must be your principal place of business. That means you use the space exclusively and regularly for administrative or management activities, such as billing customers, setting up appointments and keeping books and records, according to the IRS
• Type of home: You can claim the deduction whether you’re a homeowner or a renter, and you can use the deduction for any type of home where you reside: a single-family home, an apartment, a condo or a houseboat. You can’t use it for a hotel or other temporary lodging.

There are two methods to calculate your home office tax deduction:

• 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.

Who qualifies for the home office tax deduction?

To qualify for the home office tax deduction, you must meet the following criteria:

Exclusive and Regular Use

You must use a portion of your house, apartment, condominium, mobile home, boat, or similar structure for your business on a regular basis. This includes unattached structures on your property, such as a studio, barn, greenhouse, or garage. It's important to note that the space must be used exclusively for business purposes and cannot be used for any personal activities or contain personal items. However, there are exceptions to this rule if you use part of your home for daycare services, inventory storage, or product sample storage.

Principal Place of Business

Your home office must be either the primary location of your business or a place where you regularly meet with customers or clients. Even if you conduct business outside of your home, you can still qualify for the deduction if you also use your home office to conduct administrative or management activities, such as billing, record-keeping, or setting up appointments, and there is no other fixed location for these tasks.

Self-Employment Status

The home office tax deduction is generally not available to employees who work remotely for an employer. It is primarily intended for self-employed individuals, including independent contractors, sole proprietors, and freelancers. However, if you have a side gig or freelance work unrelated to your regular job that you do from home, you may qualify for the deduction, depending on the state you live in.

Calculation Method

There are two methods to calculate the home office tax deduction: the simplified method and the regular/actual expenses method. The simplified method allows a deduction of $5 per square foot, up to a maximum of $1,500 for a 300-square-foot space. The regular method involves calculating the percentage of your home devoted to business use and deducting a portion of your home-related expenses, such as mortgage interest, property taxes, insurance, utilities, repairs, and depreciation.

How do you calculate the home office tax deduction?

To calculate the home office tax deduction, you must first determine whether you are eligible for the deduction. To be eligible, you must be self-employed and use a portion of your home for your business on a regular basis. This can include a house, apartment, condominium, mobile home, boat, or similar structure.

If you are eligible, you can choose between the standard method or the simplified option to calculate your deduction.

The Standard Method

Using the standard method, you must complete IRS Form 8829 to compute the actual amount of the deductible home office expenses. First, you must determine the square footage of your workplace and divide that by the total square footage of your home to get a decimal that represents the percentage of your total home expenses that can be allocated toward the home office deduction.

Next, you must list all the expenses that pertain to your entire home, such as mortgage interest, real estate taxes, insurance, utilities, and depreciation for the year under the section titled "Indirect expenses" of Form 8829. Expenses that are incurred solely for the benefit of the office space are then listed under the "Direct expenses" section of the form. The indirect expenses are then totaled and multiplied by the percentage derived earlier. Then, the indirect expenses total is added to the total of the direct expenses.

The Simplified Option

The simplified option involves multiplying an IRS-determined rate by the square footage of your home office. To use the simplified option, your home office cannot be larger than 300 square feet, and you won't be able to deduct depreciation or home-related itemized deductions. The prescribed rate is $5 per square foot with a maximum of 300 square feet.

Other Considerations

• You must be accurate with your deduction in case you are audited.
• Total deductible expenses can't exceed the income from the business for which the deductions have been taken.
• If you are a renter, you can still take the home office deduction.
• If you are a W-2 employee who works from home, you are not able to take the home office tax deduction.
• If 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.
• If you use the actual expenses method, you're required to depreciate the value of your home.

What is the simplified square footage method?

The simplified square footage method is an alternative to the standard method of determining the amount of expenses one can deduct for a qualified business use of a home. The standard method has some calculation, allocation, and substantiation requirements that can be complex and burdensome for small business owners. The simplified method is intended to reduce that burden.

The simplified method was introduced in 2013 and can be used for taxable years beginning on or after January 1, 2013. To use the simplified method, one must first meet the qualification requirements for the home office deduction. These requirements include exclusive use, regular use, and business use. Exclusive use means that the home office must be used exclusively for business purposes. Regular use means that the space must be used regularly, not "every so often". Business use means that the space must be the principal place of business or used for face-to-face meetings with customers or clients on a regular basis.

The simplified method involves multiplying the 'allowable square footage' for the home office by the 'prescribed rate'. The allowable square footage is the lesser of the actual square footage of the home office or 300 square feet. The prescribed rate is $5 per square foot. The maximum deduction that can be claimed using this method is $1,500. However, one cannot claim more than their gross income from their business attributable to the business use of their home minus any business deductions that are unrelated to the use of their home. Any amount that is disallowed because of this income limitation cannot be carried over to offset income in another tax year.

The simplified method can be used for qualified business uses of only one home for a taxable year. If one has more than one qualified business use of the same home for a taxable year, they must use the same method for each qualified business use.

Which method should you use to calculate your home office deduction?

There are two methods to calculate 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.

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.

The choice of whether to use the simplified deduction or to deduct actual expenses depends mainly on which would net you the bigger tax deduction.

Frequently asked questions