Today there are lots of ways to make money working from home. Many small business owners operate out of
their home and increasing numbers of workers are opting to freelance full-time, and others choose to
take jobs that allow them to work remotely, rather than commute into an office every day. Even
employers that operate office space are more amenable to letting their employees work from home from time to
time. All of which is to say that working from home—and claiming a home office deduction—is more common now
than it ever has been before.
What Is a Home Office Deduction?
Business owners who regularly operate their businesses in their home can deduct some of their expenses
and save money on their taxes, granted they keep careful records and meet the IRS’s requirements. There
are two methods to claiming home office deductions: A simplified method that allows you to write off up to
$1,500 annually, and a more in-depth approach for home-based businesses that are large and complex.
Can You Claim Home Office Deductions?
Before we dive into how to claim home office deductions, the first business accounting
question to ask yourself is: “Can I claim a home office deduction?” When it comes to this tax deduction, the
IRS can be pretty strict on who qualifies. So to avoid an audit and get the most out of the home office
deduction, let’s review what it takes to qualify:
Exclusive and Regular Use
In order to be eligible for a home office deduction, the space you’re using for your business
must only be used for your business. This can be the hardest qualifier to meet, and the IRS is
pretty serious about it.
Say you use a separate room or multiple rooms in your house as your office for 40 hours of the work week.
If you only use that part of your house for business, you’re in the clear. But if your significant
other comes into the space to use your desk for a few hours out of that week, your exclusivity eligibility
goes out the door.
While the IRS can be very strict when it comes to this eligibility requirement, they do use a common rule
of thumb: You’ll generally meet the exclusivity requirement if personal activities take place in your home
office just as much as they would in a regular, communal office. This means that the occasional personal
phone call in your business’s home office is fine.
If you meet the exclusivity requirement, odds are you’ll meet the regularity home office deduction
requirement for your
business taxes
. There is no specific rule set to how regularly
you use the space, but if you use the space at least a few hours a day, you’ll probably be fine. If you’re
really not in space that much each week, you probably won’t qualify.
There are two exceptions to the exclusivity rule. The first exception is if you run a daycare or elderly
care center in your home. For example, if, as part of your business, you have children in your home from 8
a.m. to 4 p.m. every day, but make use of the space for personal activities from 4 p.m. on, you can still
claim a home office deduction (granted you’ve met your state’s licensing requirements). The second
exception is for business owners who dedicate a portion of their home to store their business’s inventory or
products.
Principal Place of Business
The next requirement for a home office deduction is pretty simple. While your home office doesn’t have to
be the only place you do business, it does have to be your principal place of business, i.e. the primary place you do business—meaning you bill customers,
perform regular administrative tasks, or keep books in your home office. This also could mean that your home
office is where you regularly meet clients and customers.
How to Claim Home Office Deductions
There are two ways to claim home office deductions: The simplified square foot calculation or the actual
expense deduction.
Here’s what you need to know about both:
1. The Simplified Method
The simplified method lives up to its name. All you have to do is multiply the square footage of your home
office by $5. The catch is that the maximum amount you can write off is $1,500. If you’re just starting out
or using your office for a side hustle, this might be the right method for you.
2. The Regular Method Using Form 8829
If your home office expenses are more than $1,500, you’ll want to use Form 8829. To apply this method, calculate percentages of the various expenses you want
to claim. This is likely a better option for more mature or complex home businesses.
As part of this process, expenses are classified as direct or indirect. Direct expenses are the expenses
that are clearly and definitively tied to the space that you use as a home office. Examples include
completed painting projects or renovations that were exclusively done for your home office. You may claim
100% of direct expenses.
Indirect expenses are costs related to the home or property that houses your home office. These include
things like utilities and mortgage or rent payments. You may only claim a percentage of indirect expenses,
which is the total square footage of your home divided by the square footage of your home office.
One limit to the regular method is that you can’t claim more on a home business tax deduction than you earned while working in your home office. Your claim must be proportional to the time you spend working in your home office.
Which Is Better—the Simplified or Regular Method?
It depends. Factors to take into consideration include:
The Size of Your Home Office : If your office is 300 square feet or less, the
simplified method is likely best. But if you’ve got a bigger office, you could get a larger deduction
using the regular method. Know that there’s no limit to the size of home office using Form 8829.
Mortgage and Rental Rates : If you live in an area where the cost of rent or
homeownership is traditionally high, you might be able to get a larger deduction using the regular method.
Home Depreciation : For the simplified method, you can’t deduct depreciation. Real
estate taxes and the interest on your mortgage can be claimed using Schedule A. If your home has
depreciated, you may want to consider using Form 8829. And if you ever sell your home at a profit, this
deduction will be taken into consideration in calculating your resulting tax liabilities.
Record Keeping : If this isn’t your forté, the simplified method is for you. The
regular method requires that you keep detailed records of each expense. (Even if you don’t send the
receipts in with your filing, you need to keep them on hand for a few years, just in case.)
How Much you Like Filling out Forms : The form for the simplified method has six
lines within a
Schedule C
. Compare that to that Form 8829, which has 43 lines
to complete. When you use Form 8829, it must accompany your Schedule C when you complete your filing.
How to Claim Home Business Deductions: The Definitive Solution
The best way to know which method to use is to run the numbers. Add up your home office expenses. If
they’re more than $1,500, consider using the regular method. If not, use the simplified method.
As your business grows and your calculations become more complicated, tools like
QuickBooks
,
QuickBooks™ Online, or QuickBooks™ Self-Employed can help you streamline your financial processes (and record
keeping). If you’re not one for mainstream solutions, there are also many other tools available like Xero or Sage,
for example.
Finding yourself a trusted accountant or bookkeeper can also be invaluable. As many firms switch to the
cloud, they can suggest a primary small business accounting software and a range of key apps for functions
like time tracking, data entry, payables and receivables, and payroll.
The better your tools and processes, the more you’ll be able to maximize your deductions.
Home Office Deductions for Employees
If your employer allows you to work from home or you’re a remote worker, you may also claim a home office
deduction. But if you’re a full-time remote worker, this is a bit easier to prove. If you only work a few
days a week from home, it’s harder to substantiate.
The standard for someone who’s allowed to work from home part of the time is if the home office is
maintained for the convenience of the employer.
Vague, right?
Essentially, it means that this home office is necessary for the employer’s business to function and for
the employee to fulfill their responsibilities. For example, an employee needing to perform their duties
during off-hours when the office is closed could qualify. Documentary evidence is as simple as getting
a letter from your employer confirming the need for you to work at home.
Note that you won’t be able to qualify if you choose to work from home from time to time because it is more
convenient than commuting into the office. It also doesn’t count if you like to take your work home with you
at the end of the day. If you don’t qualify but you regularly use your home office for work, try to get your
employer to reimburse you for some of your expenses.
Home Office Deductions: Other Points to Keep in Mind
In all of this, it’s important to note how the IRS defines a home office.
The two key concepts are regular and exclusive use. Regular means that you must routinely use this portion
of your home for business. Exclusivity is a bit less tangible. In essence, it implies that the area where
you work must be identifiable as a space used exclusively for business.
A home office doesn’t have to be a room within your home. It can also be a garage or outbuilding like a
studio or shed.
Home Office Deductions: FAQs
Need to know more about claiming home office deductions? Here are some frequently asked questions aboutthis
small business tax deduction
.
1. Am I Locked in Once I Pick a Method?
No, you are not. You may use either method in a given filing year. If the simplified works better one year,
use it. If regular works better the next, it’s your call. The only restriction is that you can’t use both
methods in the same filing year. It has to be one or the other.
2. Am I More Likely to Get Audited When I Claim a Home Office Deduction?
The risk is likely no larger than for any other type of deduction you claim. Studies have shown that
there’s no conclusive evidence of a greater risk. But, if you do a quick
search, you see a lot of concerning headlines. In the end, if you’ve been honest (which you absolutely
should be) and kept good records, you don’t have much to fear from an IRS audit anyhow.
3. What If I Don’t Fit the Textbook Definition of Home Office?
On a general level, caregiving is a yes and rental or hospitality use is a no. If you run licensed home
daycare or provide elder care, you may take the home office deduction using either method.
On the other hand, any expenses related to any space in your home that you use as a hotel, motel, inn, or
similar business do not fall under the home office deduction.
Know the Rules That Apply to You and Your Industry
Every industry has its own nuances within the tax code. And the traditional office isn’t so traditional
anymore. The best thing to do is to learn as much as possible. If you don’t know, look it up. Start by seeing what the IRS has to say in Publication
587—Business Use of Your Home (Including Use by Day-Care Providers).
If all this is still unclear, don't hesitate to contact us with your questions.
