Home Office Deduction: What Expenses Qualify?

If you work from home, you may be able to claim a home office deduction on your tax return. This deduction is available to self-employed people who use part of their home for business activities. To qualify, you must use a portion of your home for your business on a regular basis and exclusively for your business. This includes structures on your property, such as an unattached studio, barn, greenhouse, or garage.

There are two methods for calculating the deduction: the simplified method and the actual expenses method. The simplified method allows you to multiply the square footage of your home office space by a prescribed rate, currently $5 per square foot for up to 300 square feet. The actual expenses method involves measuring actual expenditures against your overall residence expenses. This includes mortgage interest, taxes, maintenance, repairs, insurance, utilities, and other expenses.

It's important to note that employees who work remotely are not eligible for the home office deduction. Additionally, certain expenses, such as landscaping or lawn care, may not be deductible unless a business purpose is demonstrated.

Direct expenses

• Repairs carried out in the home office, such as drywall and painting.
• Window treatments installed in the home office to ensure privacy for clients.
• A second phone line brought into the home, used exclusively for business.
• The cost of utilities that are used for business, such as electricity for lighting.
• The cost of bringing in services that benefit the whole house, such as trash collection, security services, and cleaning services.
• Rent, interest, and taxes apportioned according to the percentage of the home devoted to business activities.

Indirect expenses

If you qualify for the home office deduction, you may claim a portion of certain types of expenses that are usually not deductible by the average homeowner. These expenses are classed as either "direct" or "indirect" expenses.

"Indirect expenses" are those that benefit your entire home, not just your home office. They are deductible based on the percentage of your home used for business. For example, if your home office takes up 10% of your total home square footage, you can deduct 10% of the cost of your mortgage interest, insurance, utilities, real estate taxes, general home repairs, and other whole-house expenses, such as cleaning and exterminator fees.

The home office deduction can be particularly advantageous for homeowners as it converts an itemized deduction into a more tax-advantaged business expense deduction.

Simplified method

The Simplified Method is an easier way to determine the amount of expenses you can deduct for a qualified business use of a home. This method simplifies the calculation and record-keeping requirements of the allowable deduction.

• Standard deduction of $5 per square foot of home used for business, with a maximum of 300 square feet.
• Allowable home-related itemized deductions (e.g. mortgage interest, real estate taxes) can be claimed in full on Schedule A.
• There is no home depreciation deduction or later recapture of depreciation for the years the Simplified Method is used.

To use the Simplified Method, you must determine the allowable square footage by calculating the smaller portion of your home used for qualified business use or 300 square feet. The prescribed rate is then multiplied by the allowable square footage. The prescribed rate is $5 per square foot.

It's important to note that you can choose to use either the Simplified Method or the regular method for any taxable year. However, once you have chosen a method for a taxable year, you cannot change to the other method for that same year. Additionally, the Simplified Method cannot be used to deduct actual expenses related to the qualified business use of the home in the same taxable year.

Actual expenses method

The actual expenses method for calculating the home office deduction is the regular method, which is more complex than the simplified method. It values your home office by measuring actual expenditures against your overall residence expenses.

Using this method, you can deduct direct expenses in full. Direct expenses are those that exclusively benefit your business, such as repairing the drywall and repainting a room that is now your office.

Indirect expenses are deductible based on the percentage of your home used for business. These include mortgage interest, insurance, home utilities, real estate taxes, and general home repairs. For example, if you use 15% of your home for business, you can deduct 15% of your utility bills.

If you use the actual expenses method, you are required to depreciate the value of your home. Depreciation refers to an income tax deduction that lets taxpayers recover the costs of property due to wear and tear, deterioration, or obsolescence of the property. The depreciation you take in home office deductions is subject to capital gains tax when you sell your home.

Principal place of business

To qualify for the home office deduction, your home office must be your principal place of business. This means that you must use the space exclusively and regularly for administrative or management activities, such as billing customers, setting up appointments, and keeping books and records. You must also not have another fixed location where you conduct these activities.

If you have more than one business, your home office can still be considered your principal place of business as long as you use it exclusively and regularly for administrative or management purposes for one or more of your trades or businesses.

Even if your home office is not your principal place of business, you may still qualify for the home office deduction if you regularly meet with patients, clients, or customers there. However, this does not apply if you only meet with them occasionally or use the space for telephone calls.

Frequently asked questions