Claiming the home office deduction is a smart way to make certain expenses, such as rent, mortgage interest, utilities, and insurance, partially deductible—but there are strict rules to qualify. It’s a terrific tax break because you get to claim a portion of many different types of expenses that aren’t deductible for the average homeowner or renter.
In this post, I’ll explain who can claim the often-overlooked home office deduction, which expenses are deductible, and how to figure out the amount you can deduct. It’s important to maximize every legal tax break so you keep more of your money and reach your financial goals faster.
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Who Can Claim the Home Office Tax Deduction?
You’re qualified to claim the home office deduction if you use any part of your residence for business. This is the case whether your venture is full- or part-time or if you rent or own your home. It applies to all types of properties, such as a single-family home, condo, apartment, co-op, mobile home, or even a live-aboard boat.
According to the IRS and Forbes, an estimated 26 million Americans have home offices, but only 3.4 million claim a deduction for them. That’s a lot of potential tax savings going down the drain.
Here are the two basic requirements you and your office must meet to be eligible for the deduction:
- Regular and exclusive use – requires you to use a certain part of your home on a consistent basis for business. For instance, you might choose to work from a guest room, a detached garage, or any identifiable space. In other words, you can’t just say that because you work from the couch that your entire living area is used for business. If you live in a small place, like a studio apartment, you could have a desk that qualifies as your office. You don’t need walls to separate your office, but it should be a distinct area within your home. The only exception to this “exclusive use” rule is when you use part of your home for business storage purposes or as a daycare facility. In these two situations, you can deduct the entire spaces used, even if they are also used for personal purposes.
- Principal place of your business – requires you to show that your home is a main place where you conduct business. However, it doesn’t have to be the only place you work or meet customers. For instance, you might also work at a coffee shop, a co-working space, or meet clients in their home.
If you’re a W2 employee who works from home, there’s an additional requirement: the business use of your home must be for the convenience of your employer, not for your convenience. This might be the case if your company doesn’t have a local office or doesn’t have enough space for you.
If you’re a W2 employee who works from home, there’s an additional requirement: the business use of your home must be for the convenience of your employer, not for your convenience.
If your company does provide an office where you accomplish your primary work responsibilities, but they allow you to telecommute occasionally or you choose to work from home in the evenings or weekends, you don’t qualify.
As an employee, you’d only be eligible to claim a home office deduction if your employer requires you to work from home or to meet with customers, clients, or patients, at your residence on a regular basis. You must itemize your deductions on Form 1040, Schedule A to claim expenses for the business use of your home as an employee.
See also: 5 Retirement Options When You're Self-Employed
How Much Can You Claim for the Home Office Deduction?
If you qualify for the home office deduction, but have never taken it, you’re probably wondering how much you can claim. The deduction you receive depends on the type of calculation method you choose and the types of expenses you have.
The IRS allows you to choose between two methods and you can pick the one that gives you the largest tax break for any year:
Method #1: Standard home office deduction
This method requires you to determine the percentage of your home that’s used for business. You divide the square footage of the area used for business by the square footage of your entire home.
For example, if your home office is 12 feet by 12 feet, that’s 144 square feet. If your entire home is 1,400 square feet, then diving 144 by 1,400 gives you a home office space that’s 10% of your home. That means 10% of the qualifying expenses of your home can be attributed to business use and the remaining 90% are personal use. So, if your monthly power bill is $200 and 10% of your home qualifies for business use, you can consider $20 of the bill a business expense. To claim the standard deduction, use Form 8829 to figure out the expenses you can deduct and then file it with Schedule C, Profit or Loss from Business.
Method #2: Simplified home office deduction
This method allows you to claim $5 per square foot of your office area, up to a maximum of 300 square feet. So, that caps your deduction at $1,500 (300 square feet x $5) per year. If your office is larger, you must use the standard calculation above. The simplified method truly is simple because you don’t have to do any record-keeping, just measure the space and include it on Schedule C, Profit or Loss from Business. And if you own your home, you can also deduct home-related deductions (such as mortgage interest and real estate taxes) by itemizing them on Form 1040, Schedule A.
The simplified method works best for small home offices, while the standard method is better when your office takes up a large portion of your home. If you’re not sure which is best, try both to find which one saves you the most in taxes.
The simplified method works best for small home offices, while the standard method is better when your office takes up a large portion of your home. If you’re not sure which is best, try both to find which one saves you the most in taxes.
But no matter which method you choose, you can’t deduct more expenses than the amount of your home-based business’ gross income. If your income from the business is less than your expenses, your deduction for certain home office expenses will be limited. When your qualified deductions are greater than your income, you can carry over the excess to the next tax year.
See also: Financial Advice for Entrepreneurs Starting a Business
Which Home Office Expenses are Tax Deductible?
If you choose to take the standard home office deduction, there are a variety of personal expenses that legitimately become deductible business expenses. Maintaining these records is more of a hassle than using the simplified method, but may get you a larger deduction. (Remember that you don’t need to document expenses if you use the simplified home office deduction.)
When claiming the standard home office deduction, you need to keep track of two different types of expenses.
- Direct home office expenses – are for your office only. Let’s say you start a side business like web design or selling items on eBay. You decide to create an office in your spare bedroom and paint the room, install carpet, and install window treatments. These types of direct expense are fully deductible, no matter the size of the office.
- Indirect home office expense that pertain to your entire home – are partially deductible based on the size of your office as a percentage of your home. These are expenses that you’d have whether you had a home office or not. They might include rent, insurance, maintenance, cleaning, utilities, garbage disposal, and a security system.
See also: Buying a Home? Best Ways to Save Your Down Payment
If you’re a homeowner, taking the home office deduction gets a little more complicated because only a portion of your mortgage payment is deductible. You can claim mortgage interest, real estate taxes, homeowners insurance, and depreciation, as indirect home office expenses.
You can’t deduct the price you paid for the home, which is the principal portion of your mortgage payments. Instead, you’re allowed to recover a portion of the cost each year through depreciation deductions, using formulas created by the IRS.
Even if you don’t use your home for business, you can claim the mortgage interest deduction, which allows you to claim qualified mortgage interest and real estate taxes, if you itemize deductions on Schedule A. However, claiming these as part of the home office deduction can save you more in taxes because you shift them from an itemized deduction to a more valuable business expenses deduction.
So, how you deduct an expense and how much depends on whether it benefits the entire home (such as electricity and water), just your office portion of the home (such as remodeling or installing an additional phone line), or just your business (such as a computer or software).
For expenses that are completely unrelated to your home office—such as remodeling in other parts of your home or the addition of a pool—they’re never deductible. And you typically can’t deduct exterior expenses like yard work or gardening, even when you regularly see clients or vendors where you live.
For expenses that are completely unrelated to your home office—such as remodeling in other parts of your home or the addition of a pool—they’re never deductible.
Also note that costs pertaining to your business, which have nothing to do with your home—such as buying business insurance, a computer, and office supplies—are fully deductible as ordinary business expenses.
The rules on tax deductions for a home office can be complicated, especially for homeowners. So be sure to consult with a qualified tax accountant to help you save the most money possible when you’re working from home.
You can read all the home office rules for employees and the self-employed in IRS Publication 587.
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