How to Claim the Home Office Deduction on Your Taxes

The home office deduction allows individuals to deduct certain costs associated with using a portion of their home for business. This tax benefit is available to self-employed individuals, including independent contractors and sole proprietors, who meet specific IRS requirements for its use.

Determining Your Eligibility for the Deduction

A distinction exists between self-employed individuals and employees. Due to the Tax Cuts and Jobs Act of 2017, the deduction for home office expenses is suspended for employees for tax years 2018 through 2025. Individuals who receive a W-2 from an employer cannot claim this deduction, even if required to work from home.

For self-employed taxpayers, eligibility rests on two tests. The first is the “regular and exclusive use” test. “Regular use” means the space is used for business continuously, not just occasionally. “Exclusive use” means a specific area of the home is used only for business, with no personal activities in that space. A spare room used solely as an office meets this test, but a desk in a family room does not.

The second requirement is the “principal place of business” test. Your home office must be the primary location where you conduct your business. This can be established if it is the place where you meet with clients or customers in the normal course of business. A separate, free-standing structure, like a studio or garage, that is used exclusively and regularly for business also qualifies.

The home office can also qualify if it is where you conduct substantial administrative or management activities for your business, and there is no other fixed location for these duties. This provision allows individuals who perform their primary work outside the home, such as a plumber, to claim the deduction for the space used for tasks like billing and bookkeeping.

Identifying Deductible Home Office Expenses

Direct expenses are costs that apply only to the business portion of your home and are fully deductible. Examples include painting the walls of your home office, repairing a window within that space, or installing dedicated shelving for business materials.

Indirect expenses are costs for maintaining and operating the entire home, so only a percentage of the total cost can be deducted. Common indirect expenses include:

• Mortgage interest
• Homeowners or renters insurance
• Utilities such as electricity, gas, and water
• General home repairs that benefit the entire structure
• Security system fees

Another indirect expense is depreciation on the home. Depreciation allows a taxpayer to recover the cost of the portion of their home used for business over time. Claiming depreciation has a future tax consequence, as the total amount claimed is subject to recapture and will be taxed upon selling the home.

Methods for Calculating the Deduction Amount

The IRS provides two ways to calculate the deduction: the actual expense method and a simplified option.

The actual expense method may result in a larger deduction. First, determine the business-use percentage of your home by dividing the square footage of your office by the total square footage of your home. For example, a 200-square-foot office in a 2,000-square-foot home has a 10% business-use percentage.

You then apply this percentage to your total indirect expenses for the year. All direct expenses are 100% deductible and are added to the deductible portion of the indirect expenses to find your total deduction.

As an alternative, the simplified method allows you to deduct a standard rate of $5 per square foot of home office space. This deduction is capped at 300 square feet, limiting the total deduction to $1,500 per year. This option eliminates the need to track actual indirect expenses.

The actual expense method requires more recordkeeping but can yield a higher deduction, while the simplified method requires less paperwork for a smaller, capped amount. You can choose which method to use each year.

Required Information and Tax Form Preparation

For those using the actual expense method, claiming the deduction involves completing IRS Form 8829, “Expenses for Business Use of Your Home.” This form is the document for calculating the deduction before transferring the final amount to your main business tax schedule.

The information needed for Form 8829 corresponds to the expenses and calculations previously discussed. Part I of the form is for calculating the business-use percentage of your home. You will enter the total square footage of your home and the area used for business.

Part II is where you will list your actual expenses, separated into direct and indirect costs. The form applies the business-use percentage from Part I to the indirect expenses to determine the deductible portion. Part III is used to calculate the depreciation deduction for your home, requiring the home’s cost basis and the date it was first used for business.

If you opt for the simplified method, you do not file Form 8829. The calculation is performed on a worksheet found within the instructions for your business tax schedule, such as Schedule C.

How to Claim the Deduction on Your Tax Return

After calculating your deduction, the final step is to report it on your income tax return. For most self-employed individuals, the home office deduction is claimed on Schedule C (Form 1040), “Profit or Loss from Business.”

The total deductible amount is entered on Line 30 of this form. If you used the actual expense method, the final figure from Form 8829 is transferred directly to this line. If you used the simplified method, the amount you calculated on the corresponding worksheet is entered here.

It is necessary to maintain thorough records to substantiate your claim in the event of an IRS inquiry. You should keep all supporting documents for several years after filing your return. These records include receipts for expenses, utility bills, mortgage and property tax statements, and documentation of your square footage calculation.