The home office deduction is a tax benefit available to self-employed individuals and business owners who use a portion of their home as a workspace. The space must be used exclusively and regularly for business purposes to be eligible for the deduction. In the United States, individuals who claim the home office deduction can deduct a portion of their mortgage interest, property taxes, utilities, repairs, and other expenses related to the workspace. The amount of the deduction is calculated based on the size of the workspace concerning the total size of the home.
The home office deduction table below gives a snapshot of the deduction and who qualifies to claim the deduction.
|Self-employed||Shareholders of Corporations||Employees|
|Description||Individuals who operate their business under their own name and/or receive 1099 forms. Individuals who are Single Member LLC owners.||Small business owners who operate their businesses under S-Corporation or C-corporation.||Individuals who work for others and receive paychecks. They receive W-2 forms from employers.|
|Qualify for Home Office Deduction?||Yes||Yes||No|
|How to claim Home Office Deduction?||Fill out Form 8829, Expenses for Business Use of Your Home, and include it as part of their Schedule C (Form 1040), Profit or Loss from Business.||
1. Rent home office to the Corporation.
2. The Corporation reimburse the employee-owner for home office expense.
3. Tax-free rental income from the corporation; The Agusta Rule, Section 280A(g).
|Not available anymore since December 31, 2017. The Tax Cuts and Jobs Act eliminated miscellaneous itemized deductions subject to 2% adjusted gross income.|
Note that the tax law may change over time. Make sure you have the latest information about the home office deduction.
Does Self-Employed Qualify for Home Office Deduction?
Yes, self-employed individuals and farmers are allowed to claim the home office deduction. Self-employed individuals can claim home office deductions on Schedule C and farmers on Schedule F.
Self-employed individuals can claim a home office deduction for business use of their home if they meet specific criteria. To report the deduction, they must fill out Form 8829, Expenses for Business Use of Your Home, and include it as part of their Schedule C (Form 1040), Profit or Loss from Business. The form calculates the deductible amount based on the percentage of the home space used for business, taking into account expenses such as rent or mortgage interest, insurance, utilities, and repairs. It’s important to keep accurate records and documentation to support the deduction.
Can You Claim Home Office if You Have a Corporation?
You can deduct home office deductions one of the two ways when you operate your business as an S Corporation or C Corporation:
- Rent home office to the Corporation. The Corporation deducts the rent and reduces the taxable income (K-1 for S Corporation). However, the owner has to report the rental income on the personal income tax return.
- The Corporation reimburse the employee-owner for home office expense. This is a better way to deduct home office deduction than renting a home office to the Corporation. Consider this option if you have corporated your business.
Download the free excel home office reimbursement request and calculator form here: home-office-reimbursement-form.
You may also take advantage of the Augusta Rule to get tax-free rental income from your Corporation. Check this article to learn more about the Augusta Rule.
Do Employees Qualify for Home Office Deduction?
Before 2018, individual taxpayers who chose to itemize could claim home office deductions on Schedule A. The Tax Cuts and Jobs Act eliminated miscellaneous itemized deductions subject to 2% adjusted gross income from December 31, 2017, until January 1, 2026. Therefore, only self-employed individuals and farmers can now claim the home office deduction. Employees who work for others and receive a paycheck or a W-2 can not use home office deductions even if they work from home.
What Qualify For Home Office Deduction
You can claim home office deduction by the portion of the house that is used exclusively and regularly for any of the following:
- The home is the taxpayer’s principal place of business
- A place of business where customers are met by the taxpayer in the taxpayer’s normal course of business
- A structure separate from the taxpayer’s home used in connection with the trade or business
- Administrative or management activities
- Storage of inventory or product samples
- Rental use
- As a daycare facility
A home office can be part of any dwelling unit property. A dwelling unit is a property that provides basic living accommodations (sleeping space, a toilet, and cooking facilities). A dwelling unit can be fixed or mobile, and maybe a house, apartment, condominium, mobile home, recreational vehicle, boat, or similar property. It also includes separate structures on the property. For example, an unattached garage, studio, barn, or greenhouse can qualify for a home office deduction.
Principal Place of Business
The principal place of business is the most significant place for the business, as determined through a comparison of all places where business is transacted. A taxpayer is considered to have a principal place of business for each trade or business in which the taxpayer is engaged.
Administrative and Management Activities
In the Taxpayer Relief Act of 1997, the relative importance test and time test were not removed, but home offices where administrative or management activities are performed could qualify for the deduction. The Act allows for more self-employed taxpayers to claim the home office deduction by adding two additional criteria that permit the home office to meet the definition of “principal place of business if”:
- It is used exclusively and regularly for administrative or management activities of the business and
- There is no other fixed location where substantial administrative or management activities for the trade or business are conducted.
- Activities that qualify as administrative or management are billing customers, clients, or patients.
Disqualifying Activities for Home Office Deduction
The following activities performed by the taxpayer, employees, or others will not disqualify the taxpayer’s home office from being the principal place of business:
- The taxpayer may occasionally conduct minimal administrative or management activities at a fixed location outside the home.
- Other individuals or businesses may conduct administrative or management activities at locations other than the home office. For example, activities such as billing can be performed by a third party at the third party’s place of business.
- Substantial nonadministrative or nonmanagement business activities may be performed at a fixed location outside the home. For example, a consultant who owns his own business meets with his main client weekly at the client’s office.
- Management or administrative activities may be performed if the locations are not fixed, i.e., when the taxpayer travels for business.
- A self-employed individual may have a home office even if other spaces are available for use.
Exclusive and Regular Use
The home office is considered to be used exclusively if that portion of the home is used solely for business purposes. A home office does not need to be an entire room, and physical barriers between the home office and the rest of the home are not necessary. However, physical separation makes proving the exclusiveness test easier.
Suppose a portion of the home designated as a home office is used at any time for non-business (personal) purposes or for storing personal-use property. In that case, the exclusive-use test will not be met, resulting in complete disallowance of the deductions.
A portion of the home used exclusively for business purposes will only qualify as a home office for tax purposes if business use occurs regularly. Incidental or occasional use is not sufficient.
EXAMPLE: A doctor, who also rented farm property, was denied a home office deduction when he failed to prove that his farm management activities (performed in his home office) were “regular, systematic, and continuous” [Anderson, TC Memo 1982-576].
There are following two exceptions to the exclusive use test.
Storage of Inventory
The space within the home that is used for the storage of inventory and product samples is allowable. The space must be a separately identifiable space suitable for storage, and the home must be the only location of the business. A retailer or wholesaler who uses a portion of the home as the sole location of the business does not need to meet the exclusive use test.
The home office deduction may be taken for the portion of the house that is used to provide daycare regularly for children, and the elderly over 65 years of age. They are physically or mentally unable to care for themselves, even if the space is used for non-business purposes. Investment activities generally do not meet the standard of a trade or business unless the taxpayer is a broker or dealer. Therefore, these activities do not qualify for home office treatment for a sole proprietor.
How to Calculate Home Office Deduction?
Since the 2013 tax year, taxpayers have had two options to calculate the home office deduction.
- The regular method (also known as the actual expense method) requires allocating direct and indirect expenses to the home office.
- The optional simplified method makes the process easier by providing a standard rate per square foot of office space and eliminates depreciation recapture.
The taxpayer can choose which method to use each year but cannot change the method used for a given year once the return is filed. The change in method is not considered a change in accounting method, so approval from the IRS Commissioner is not required.
Using a home office does not affect business expense tax deductions unrelated to the home. Expenses such as contract labor, supplies, depreciation of assets held in the office, and advertising are fully deductible to the taxpayer.
Regular Method: Actual Expense Method
Only expenses allocable to the portion of the home being used for business purposes may be deductible for tax purposes. Home office deductions cannot be based on what comparable rental costs for space would be; the deduction must be based on actual costs allocated based on square footage or the number of rooms.
Expenses allowable for the business use of the home must be classified as either direct or indirect expenses. The home office tax deduction before any limitations is calculated as follows:
Direct expenses + (Indirect expenses × Business portion of home ÷ Total home)
Direct expenses are those expenses that benefit only the business part of the home and are fully deductible. Included are painting or repairs made to the area or room used for business. Allocation of expenses is not required because they are not associated with any personal portion of the residence.
Indirect expenses are those expenses incurred in maintaining and running the entire home. To be deductible, indirect expenses must be related in some way to the part of the home used for business. Examples of indirect expenses are expenses for maintaining and running the home. These include rent, real estate taxes, mortgage interest, casualty losses, utilities and services, insurance, repairs, security systems, and depreciation.
The taxpayer may determine the expenses allocable to the portion of the home which is used for business purposes by any method that is reasonable. Suppose the rooms in the home are of approximately equal size. In that case, the taxpayer may ordinarily allocate the expenses of the home according to the number of rooms used for the business purpose to arrive at the business percentage. The taxpayer may also arrive at the business percentage by dividing the square feet used regularly and exclusively for business by the total square feet of the home. The indirect expenses are then allocated by multiplying them by the business percentage.
Expenses attributable only to certain portions of the home, such as repairs to kitchen fixtures. Additionally, expenses not related to the use of the home for business purposes, such as expenditures for lawn care, are not included in the home office deduction.
EXAMPLE: An electric bill is $500 for lighting, cooking, laundry, and television. Only $200 of the electric bill is used for lighting, and 25% of the home is used for business. The home office treats only $50 of the electric bill as a direct expense.
Only mortgage interest that (1) would be deductible on Schedule A and (2) qualifies as a direct expense is an eligible indirect expense.
Only the personal portion of deductible mortgage interest and real estate taxes can be claimed on Schedule A for a taxpayer using the regular method.
The regular and local telephone service charge, including taxes, for the first telephone line into a taxpayer’s home, is a nondeductible personal expense. However, charges such as for international business phone calls on the same line are included. , The cost of a second phone line into the home used exclusively for business are deductible business expenses. Do not include telephone expenses as a home office cost. These charges are deducted separately on the appropriate form or schedule. For example, these expenses belong on utility line 25 of Schedule C instead of the line for home office expenses.
A deduction can be taken for the business part of the expenses incurred to maintain and monitor a security system installed to protect the home. Any initial cost is capitalized, and a depreciation deduction can be used for part of the cost of the security system if relating to the business use of the home.
More than One Business
If a home was used in more than one business, the taxpayer allocates the allowable expenses for business use of the home to each business. Whether a home office qualifies as a principal place of business must be determined separately for each business activity. Each business activity that uses the home office must qualify. Or the home office deductions will be disallowed for every business.
What is the “Simplified Method”?
The simplified method allows an alternate calculation for the home office deduction. The home office must qualify under the same rules for a deduction as under the original method.
The simplified method for the home office deduction allows a taxpayer to deduct $5 for each square foot allocated to the home. It is up to 300 square feet instead of a deduction for actual expenses related to the qualified business use of the home. Additionally, itemized deductions for qualifying mortgage interest, real estate taxes, and casualty losses can be claimed in full on Schedule A. Depreciation is not taken, reducing the amount of paperwork and preventing any future recapture.
EXAMPLE: Paul has a 200-square-foot home office and uses the simplified option. Paul deducts
$1,000 from his Schedule C (200 sq. ft. × $5 per sq. ft.). He deducts all qualifying mortgage interest and real estate taxes on Schedule A.
Using the simplified option prevents the use of unused home office deductions carried forward. Taxpayers may benefit from the simplified option when:
● The cost to maintain the home office is less than the standard rate.
● The time and cost of recordkeeping for the home office are greater than the tax savings using the original method.
● The majority of home office expenses are related to mortgage interest and real estate taxes, which are deductible in full under the simplified option.
● There is no depreciation expense for improvements specific to the home office, or the expense is minimal.
● The taxpayer plans on moving soon, and the depreciation recapture will make the original method less beneficial.
The simplified method cannot be used for the rental use of the home.
Is there any Income Limitation for Home Office Deduction?
The home office deduction is limited to income from the trade or business for which the home office is used. Any excess amount may be carried over and deducted in the following year, subject to the gross income limitation for that year, whether or not the taxpayer continues to use the home as a residence during that year.
The gross income of the business use of the home is the net income from Schedule C or F before any home office deduction and any net gain or loss derived from the business use of the home shown on Schedule D or Form 4797.
Suppose the taxpayer engages in a business in the home office and in one or more other locations. In that case, the taxpayer must allocate the gross income from the business to the different locations on a reasonable basis.
Business Furniture and Equipment
Taxpayers may take depreciation and Sec. 179 for furniture and equipment (s)he uses in a home for business. These deductions are available whether or not the taxpayer qualifies to deduct expenses for the business use of the home.
Listed property is tangible property that is split between personal and business use. That includes passenger automobiles; property used for entertainment, recreation, or amusement. The Tax Cuts and Jobs Act removes computer equipment placed in service after December 31, 2017, from being classified as listed property.
The more-than-50%-use rule applies to listed property. Suppose the listed property is purchased and placed in service during the year. In that case, it must be used more than 50% for the business to claim a Sec. 179 deductions or an accelerated depreciation deduction. Suppose the business use of the listed property is 50% or less. In that case, the taxpayer cannot take Sec. 179 deductions and must depreciate the property using the Alternative Depreciation System (ADS) (straight-line method).
Property converted from personal to business use can be depreciated as long as the property was purchased after 1986. The property must be properly valued.
Depreciation of Residence
A deduction can be claimed for depreciation if the taxpayer owns his or her own home and qualifies to deduct expenses for its business use.
Sale of Residence
The exclusion for the sale of a taxpayer’s principal residence does not apply to the extent of any depreciation allowable for the home office after May 6, 1997. The recognition of a gain occurs for the amount of allowed depreciation. Under the final regulations, no allocation of gain (except for the amount of
depreciation) is required if both the residential and non-residential portions of the property are within the same dwelling unit [Reg 1.121-1(e)(1)].
How to Do Recordkeeping for Home Office Deduction?
The taxpayer does not have to use a particular method of recordkeeping. But the taxpayer must keep records that provide the information needed to calculate the deduction for the business use of his or her home. The taxpayer should keep canceled checks, receipts, and other evidence of expenses paid. The taxpayer’s record generally must show the following information:
- The part of the home that the taxpayer uses for business,
- The evidence that the taxpayer uses part of the home exclusively and regularly for business,
- Businesses use depreciation and expenses.
The taxpayer should also keep records to prove the home’s depreciable basis. That includes the following records:
- when and how the taxpayer acquired the home,
- the home’s original purchase price,
- any improvements to the home,
- and any depreciation allowed because the taxpayer maintained an office at home.
Forms and Schedules for Home Office Deduction
A taxpayer who files a Schedule C and uses his or her home in the trade or business must report the entire deduction for business use of the home on line 30 of Schedule C. The taxpayer files Form 8829,
Expenses for Business Use of Your Home, to report home office expenses if (s)he does not elect the simplified method for the home. If the taxpayer has more than one business, (s)he must file one Form 8829 for each business, and only the amount of home office expense allocated to that business is reported on Schedule C.
In addition, the taxpayer may need to file Form 4562, Depreciation and Amortization, for the house or new assets if
- The home was first used for business in the current year or
- Additions and improvements that are being depreciated were placed in service in the current year.
For additions and improvements placed in service after the business use of the home began. Attach a schedule showing the cost or other basis of the asset.