Home office expenses are expenses incurred from the operation of a business or the performance of employment-related activities within a primary residence.
Key Takeaways
- Expenses you incur in the operation of a business you conduct in your home are deductible on your federal taxes within certain limits.
- To calculate your expenses and deductions, you can either tally up all your costs and calculate the percent of your home dedicated to your business or use simplified method to do the same calculation.
- The rules for deductions changed with the Tax Cuts and Jobs Act of 2017, so make sure to get information on deductions published in 2018 or later.
Understanding Home Office Expenses
Home office expenses allow individuals to deduct some housing expenses such as utilities, interest paid towards the property’s mortgage and property taxes on their annual tax return.
Home Office Deductions
Expenses incurred by a business you conduct in your home are the basis for home office deductions that can lower your tax bill if you are self-employed.
Any services or utilities that are used exclusively for the business purposes can be fully deducted. This includes offices supplies, phone lines and computer equipment. The amount of deductions permitted will depend on several factors, including how a homeowner files their return and their earnings, but most will be able to claim several items as expenses as long as they are incurred during the normal course of business.
A home office will only qualify for home office deductions if it meets the following criteria:
- It is used exclusively and regularly as your principal place of business.
- It is used exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business.
- It is a separate structure that is not attached to your home that is used in connection with your trade or business.
- It is used on a regular basis for certain storage use.
- It is used as a rental for your business.
- You use your home as a daycare facility.
The rule of thumb is “exclusive and regular”: the place you designate as your home office has to be used exclusively and regularly as a home office. As per the IRS, “The space does not need to be marked off by a permanent partition. You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.”
If you have a corner of your house with a desk that you only use to transact business, that qualifies as a home office space, but if you conduct your business on a laptop while sitting on your couch next to a family member who is watching TV, you cannot claim the couch as a home office.
How to Calculate Home Office Expenses
There are two ways the IRS says you can calculate how much of your home constitutes a home office and how much of your incurred expenses are deductible. The first way (the “regular” method) is to calculate your actual expenses. The second way is called the “simplified” method, which is faster but may not yield as many deductions.
The Regular Method
The method that uses an accounting of your actual expenses begins with calculating the following:
- Which of your business expenses are direct, indirect or unrelated.
- The percentage of your home used for business purposes.
Direct expenses are things like painting or repairs only in the area used for business. Indirect expenses are expenses for the entire home like insurance, utilities, and general repairs that also benefit your home office.
To figure out the allowable business percentage of your home area, the IRS gives two methods:
- Divide the area (length multiplied by the width) used for business by the total area of your home.
- If the rooms in your home are all about the same size, you can divide the number of rooms used for business by the total number of rooms in your home.
The regular method requires keeping accurate records, but the IRS provides a helpful worksheet to set taxpayers on the right path.
Home Expenses Deductions Limited
If your expenses are less than your gross income from the business conducted in your house, all your expenses are deductible, but if your expenses exceed your gross income only a portion of them can be deducted.
The Simplified Method
The simplified method was introduced in 2013 to simplify the calculation of allowable deductions for your home office. To calculate your deductions with the simplified method you need to know:
- The allowable area of your home used in conducting the business. If you did not conduct the business for the entire year in the home or the area changed during the year, you will need to know the allowable area you used and the number of days you conducted the business for each month.
- The gross income from the business use of your home.
- The amount of your business expenses that are not related to the use of your home.
- If the qualified business use is for a daycare facility that uses space in your home on a regular (but not exclusive) basis, you also will need to know the percentage of time that part of your home is used for daycare.
Once you have this information you can calculate your deduction with these steps:
- Multiply the allowable area by $5 (or less than $5 if the qualified business use is for a daycare that uses space in your home on a regular, but not exclusive, basis).
- Subtract the expenses from the business that are not related to the use of the home from the gross income related to the business use of the home. If these expenses are greater than the gross income from the business use of the home, then you cannot take a deduction for this business use of the home.
- Take the smaller of the amounts from (1) and (2). This is the amount you can deduct for this qualified business use of your home using the simplified method.
Other rules apply that limit the filer’s ability to use the simplified method. For example, if you share the space with another person you can’t both deduct the same space.
Real-World Examples of Home Office Expenses
As an example, consider a freelance writer who operates their own business out of their home. They have a dedicated office space which is approximately 200 square feet, a cell phone that is only used for work-related calls and a subscription to a magazine that provides editorial leads to writers. All these items are tax-deductible as home office expenses, including the 200 square feet of the writer’s house, since that room is used for business purposes.
Additionally, the writer can deduct the ink that they use to print contracts out, the full cost of the all-in-one printer that they had to purchase to be able to send those signed contracts in and any industry-related training they complete.
Real Estate Deductions Are Capped
Because the Tax Cuts and Jobs Act limited the amount of property tax filers can deduct, you cannot use the home office deduction to deduct the full amount of your property tax if it exceeds $10,000.
There are various expenses that can be deducted when a person works out of their home, whether it be as a remote employee or because they are self-employed. A certified tax specialist can review available deductions and make sure that all items that are being claimed are valid.
For instance, if this freelance writer didn’t have a dedicated office space and instead worked out of the coffee shop around the corner from their house every day, they wouldn’t be able to claim the utility and mortgage associated costs as part of their home office deduction. There may be additional deductions available to them, like the coffee and donut they purchase each day while working out of the shop.
Related Terms: tax deductions, home expenses, self-employment taxes, tax savings, IRS regulations.
References
- Internal Revenue Service. “Publication 587, Business Use of Your Home (Including Use by Day Care Providers)”, Page 2.
- Internal Revenue Service. “Topic No. 509, Business Use of Home”.
- Internal Revenue Service. “Publication 587, Business Use of Your Home (Including Use by Daycare Provider)s”, Page 3.
- Internal Revenue Service. “Publication 587, Business Use of Your Home (Including Use by Day Care Providers)”, Pages 6-10.
- Internal Revenue Service. “2020 Instructions for Form 8829, Expenses for Business Use of Your Home”, Page 2.
- Internal Revenue Service. “Publication 587, Business Use of Your Home (Including Use by Day Care Providers)”, Page 9.
- Internal Revenue Service. “Publication 587, Business Use of Your Home (Including Use by Daycare Providers)”, Page 21.
- Internal Revenue Service. “Publication 587, Business Use of Your Home (Including Use by Day Care Providers)”, Pages 10-12.
- Internal Revenue Service. “Publication 587 Business Use of Your Home (Including Use by Daycare Providers”, Pages 11-12, 26.
- Internal Revenue Service. “Publication 587, Business Use of Your Home (Including Use by Day Care Providers)”, Page 11.
- Internal Revenue Service. “Publication 5307, Tax Reform Basics for Individuals and Families”, Page 5.
