Home Office Tax Deductions

The home office tax deduction is a tax break for self-employed people who use part of their home for business activities. Small-business owners, freelancers, independent contractors, or gig workers who regularly and exclusively use part of their home for work and business-related activities may be able to write off rent, utilities, real estate taxes, repairs, maintenance, and other related expenses.

To qualify for the home office tax deduction, you must use part of your home regularly and exclusively for business. Your home office must be your principal place of business, meaning 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 methods for calculating the home office tax deduction: the simplified method and the actual expenses method. The simplified method allows for a deduction of $5 per square foot for up to 300 square feet of space. The actual expenses method involves measuring actual expenditures against your overall residence expenses and deducting a percentage of your home used for business.

Who qualifies for home office tax deductions?

To qualify for home office tax deductions, you need to be self-employed, a small business owner, a freelancer, or another type of independent contractor. The home office deduction allows these workers to subtract the money they paid for home office expenses from their income, thus reducing their overall tax liability for the year.

Your home office must be your principal place of business or a place where you regularly meet with customers or clients, and you usually must use the area exclusively for your business. This means that the space must be used only for business and cannot be used for personal purposes.

There are some 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 provide daycare services for children, older adults, or individuals with disabilities.

If you are an employee working remotely for a company, you don't qualify for the home office tax deduction. Prior to the Tax Cuts and Jobs Act (TCJA) passed in 2017, employees could deduct unreimbursed employee business expenses, including the home office deduction. However, for tax years 2018 through 2025, these deductions for employee business expenses have been eliminated.

How do you calculate the deduction?

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

Simplified Method

The simplified method is a quick and easy way to determine your home office deduction. Simply multiply your office’s total square footage by $5. The maximum amount you can claim using the simplified method is $1,500 (300 square feet), which can reduce your taxable income.

Actual Expenses Method

The actual expenses method allows you to claim a tax deduction based on the percentage of your home office square footage and home-related expenses. With this option, you can claim home-related expenses such as rent, mortgage interest, utilities, insurance, repairs, and other expenses.

To determine the actual expenses method, first, divide your home office square footage by your home’s total square footage to obtain your deductible percentage. Next, multiply your percentage by the sum of your home’s total allowable expenses to get your home office deduction.

For example, if your home office measures 150 square feet, and the total area of the house is 1,200 square feet, your business percentage would be 12.5%.

An easier calculation is acceptable if the rooms in your home are all about the same size. In that case, you can figure out the business percentage by dividing the number of rooms used in your business by the total number of rooms in the house.

What is the process for taking the deduction?

The process for taking the home office deduction depends on the method used to calculate it.

Simplified Method

If you use the simplified method, you'll take the deduction directly on Schedule C when reporting the income and expenses for your business.

Regular Method

If you use the regular method, you'll submit a Form 8829 with your tax return. Afterward, you'll report the total deduction from the business income on Schedule C.

Other Considerations

If your home office expenses are more than your business income for the year, your deduction will be limited, as your Schedule C income cannot go below zero using business use of home office expenses.

If you're only eligible for the deduction for a few months of the year, you can still claim a partial home office tax deduction. Be sure to only use expenses for the months you were self-employed, or otherwise eligible, to calculate the deduction.

Can you claim the deduction after only a few months of being self-employed?

Yes, you can claim a partial home office tax deduction even if you were only self-employed for a few months of the year. Just make sure to only use expenses for the months you were self-employed, or otherwise eligible, to calculate the deduction.

If you choose to use the simplified deduction method, you can prorate the amount you can deduct by using the number of months you worked from home. You can also choose to deduct a portion of actual expenses for the months you were eligible for the deduction.

Will a home office tax deduction trigger an audit?

The home office tax deduction is a legitimate business expense that qualifying homeowners and renters should not ignore. However, there is a persistent myth that claiming this deduction will trigger an audit from the IRS. So, is there any truth to this?

The Origins of the Myth

This myth has been perpetuated due to changes in tax law and the IRS's normal fraud detection measures. The introduction of Section 280A in the Tax Reform Act of 1976 allowed taxpayers to deduct expenses like utilities, home insurance, and home depreciation on a prorated basis. Since then, there have been frequent changes to IRS rules and Supreme Court decisions that impact the application of Section 280A, causing confusion and concern among taxpayers.

Additionally, the IRS's fraud prevention system, known as the Discriminant Inventory Function (DIF), compares tax returns to those of other taxpayers with similar profiles, flagging any anomalies. This, along with the creation of the IRS Fraud Enforcement Office in 2020, has contributed to the perception that claiming a home office deduction is a red flag for an audit.

Factors that Could Trigger an Audit

While claiming a home office deduction alone will not trigger an audit, there are certain factors that could increase the risk:

• Unusual profession for claiming a home office: If it is uncommon for someone in your profession to claim a home office, it may raise suspicions.
• Claiming too much space for your home office: If the amount of space you claim for your home office is not reasonable compared to the size of your home, it could be a red flag.
• High deduction-to-income ratio: If the amount you are deducting is significantly higher than your income, it may attract the attention of the IRS.
• Other audit risk factors: Not reporting all income, overstating expenses/deductions, late payments, or failure to file tax returns are all factors that can increase the risk of an audit.

How to Minimize the Risk of an Audit

To minimize the chances of your home office deduction triggering an audit, it is important to:

• Ensure you qualify for the deduction by meeting the criteria for eligible taxpayers, residence types, and business use.
• Accurately track your expenses and maintain orderly receipts and records to back up your claims.
• Only claim a reasonable amount of space for your home office, proportional to the size of your home.
• Consult with a tax professional or use appropriate tax software for advice and guidance.

Frequently asked questions