What Is the Home Office Tax Deduction?
The home office deduction allows you to write off some of your home costs when you do your taxes. Deductible expenses include the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs. To figure out your home office deduction, you can use either the simplified or regular method, which we discuss below.
What Are the Requirements for a Home Office?
To deduct home office expenses, you must pass both of the following tests:
1. This area of your house must be used:
- Regularly and exclusively for a trade or business
- For storage of inventory or product samples, OR
- As a day-care facility; AND
2. This section of your home must be:
- The principal place of business;
- A place where you meet or deal with patients, clients, or customers in the normal course of business, or a place that is essential to conducting your business; OR
- A separate structure used for business purposes
If you run your business from somewhere other than your home, you may still be eligible for this deduction. For instance, you have a separate structure, such as a detached garage, where you store inventory.
The home office must also be used in a trade or business. Prior to 2018, employees could deduct the use of a home office as an employee business expense on Schedule A—but this is no longer allowed.
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What Expenses Qualify for the Home Office Deduction?
Here are some costs that you may write off as a home office expense, either fully or partially:
- Mortgage interest
- Security system
- Casualty losses not attributable to a federally declared disaster
Simplified Method of Calculating Your Home Office Deduction
Calculating for the simplified method is easier than the regular method. You can make this annual election simply by filing your tax return and using this method.
To figure out how much you can deduct, multiply the square footage of your qualified home office by $5 (up to a maximum of 300 square feet).
However, even though this method is simpler, you should know the following:
- The deduction cannot exceed gross income; any deduction amount in excess of gross income is not carried forward to future years.
- You cannot claim a loss carryover from using the regular method in a prior year when using the standard method in the current year.
- The depreciation deduction is zero, so there is no effect on any future gain or loss from a sale.
- If you use the simplified method for one year and the regular method for any year after that, you must use the alternative depreciation system (ADS). This means you’ll depreciate your home office over 40 years instead of 39.
How To Calculate Your Home Office Deduction Using the Simplified Method
Step 1: Multiply the allowable area by $5 (up to a maximum of 300 square feet).
Step 2: Determine your net income from the business prior to any home office deduction by subtracting all your non-home office expenses from gross income.
Step 3: Take the smaller of the two amounts from Steps 1 and 2. This is the amount you can deduct for the qualified business use of your home using the simplified method.
You can use the IRS’s Simplified Method Worksheet if you are a partner or if you use your home for your farming business and file Schedule F (Form 1040).
Mrs. X regularly and exclusively uses her basement to run her home-based accounting firm. This section of her home is her principal place of business. She regularly meets her clients in this dedicated space to do tax returns and bookkeeping work.
- Square footage of Mrs. X’s basement: 300
- Her non-home office business expenses: $5,000
- Her gross income: $20,000
To figure her home office deduction, we will do the following:
Step 1: 300 square feet multiplied by $5 is $1,500.
Step 2: $20,000 (gross income related to the business use of the home) – $5,000 (business expenses that are not related to the use of the home) is equal to $15,000.
Step 3: $1,500, the smaller of the two amounts from Steps 1 and 2, is the amount Mrs. X can deduct using the simplified method.
Regular Method of Calculating Your Home Office Deduction
The regular method will often provide a larger deduction than the simplified method, but it also requires more work. You may deduct all direct business expenses in full and allocate the indirect total expenses of the home to the percentage of the home floor space used for business.
Expenses incurred only in the business part of the home, such as new flooring and painting repairs
Expenses for keeping your whole house up and running, such as insurance, utilities, and general repairs
Based on the percentage of your home used for business
Expenses for the parts of your home that you don't use for your business
How To Calculate Your Home Office Deduction Using the Regular Method
To figure out the business percentage of your home, you can use one of the following methods:
Step 1: Figure the total square footage of the entire home.
Step 2: Figure out what percentage of the home is used for business. Divide the square footage used for business by the total square footage, then multiply the decimal by 100 to arrive at the percentage.
Step 3: Calculate the direct expenses related to the business use of the home. Add these expenses together.
Step 4: Figure out the indirect costs of running your business out of your house. Multiply each indirect cost by the percentage of the home that is utilized for business (percentage from Step 2), and then sum up all of the costs.
Step 5: Add the outcomes of Step 3 and Step 4 together. The total is the home office expense for the given year.
Mr. Y rents his home and uses a portion as dedicated office space to run his tax preparation business. The following applies.
- Square footage of Mr. Y’s home: 4,500
- Square footage of Mr. Y’s home used for business: 900
- His 2022 net income after non-home-office expenses: $10,000
- His direct expenses related to the business use of his home:
- Painted the office: $300 (100%)
- Installed new carpet: $1,000 (100%)
- Paid for business landline: $80 (100%)
Mr. Y also incurred the following indirect expenses:
- Mortgage interest: $10,000
- Property taxes: $2,000
- Utilities: $1,500
- Homeowners insurance: $1,200
- Depreciation: $8,000
Let’s figure his home office expense.
Step 1: Total square footage of Mr. Y’s home: 4,500
Step 2: Percentage used for business: 900/4,500 = .20. Then multiply .20 by 100, which equals 20%.
Step 3: Mr. Y’s total deductible amount of direct expenses is $1,380 (300 + 1,000 + 80).
Step 4: Mr. Y’s total deductible amount of indirect expenses is $4,540 (2,000 + 400 + 300 + 240 + 1,600).
Step 5: Mr. Y’s total home office expenses are $5,920 for 2022 (1,380 + 4,540). He can deduct the entire amount since it is less than his taxable income from the activity of $10,000.
Carryover of Disallowed Home Office Expenses
If your qualified home office expenses are more than your taxable income from that business activity, then you can’t claim the extra home office expense. The disallowed expense is treated differently depending upon which of the three categories it belongs to.
Treatment of Excess Expenses
Home mortgage interest and property taxes
Deduct on Schedule A in the current year
Other home office expenses
Utilities and insurance
Carryover to next year as a home office expense
Do not reduce the basis of the home by excess depreciation
To determine the exact expenses that are disallowed, you must apply the three categories of expenses against your taxable income in the following order:
- Otherwise-deductible expenses.
- Other home office expenses.
For instance, if you offset all of the available taxable income with category 1 expenses, then all category 2 and 3 expenses will be disallowed.
Let’s use the same numbers as the above example but assume that the income from the business activity was only $3,000 (instead of $10,000). As such, we can only deduct $3,000 (income) of the $5,920 of home office expenses.
We must now determine the expense category of the excess $2,920 that is disallowed. First, let’s separate our home office expenses into the three categories listed above. Then, we’ll deduct the expenses from the $3,000 of business income.
Real Estate Taxes
Carryover to next year
Do not reduce basis of house for depreciation not deducted
So, our home office deduction is $3,000 (business income), and there is a home office deduction carryover to next year of $1,320. The $1,600 of disallowed depreciation is essentially ignored so that the basis of the house is not reduced.
A qualified daycare provider is the only business that is allowed to use the home office deduction for space within the house that is not used exclusively for business. In other words, daycare providers can deduct costs related to rooms that are used for business during the day and used for personal purposes in the evening.
This makes the calculation of the home office deduction for qualified daycare providers a bit more difficult. But to guide you, follow the process below:
Step 1: Calculate the square footage of the home available to children during the hours the daycare is open and divide that by the total square footage of the house.
Step 2: Multiply the percentage from Step 1 by the percentage of a 24-hour day that the daycare is open. For instance, if there are kids at the daycare for 12 hours per day, then multiply the percentage from Step 1 by 50%.
Step 3: Multiple the percentage from Step 2 by the indirect home office expenses to determine your deduction.
Where To Report Your Home Office Deduction
You can claim the deduction for this expense on Form 1040 or Form 1040-SR. Whether you are self-employed, a farmer, or a partner determines where you deduct these expenses.
Where to Deduct Expenses
Form 8829 and Schedule C Line 30
Form 8829 and Schedule F Line 32
Form 8829 and Schedule E, Page 2, as a separate line item to reduce your partnership income
Frequently Asked Questions (FAQs)
No, employees can’t deduct their home office expenses on Schedule A for tax years 2018 through 2025.
Typically, you cannot claim a deduction for utilities and services not used in the business. This includes items like lawn care and the home phone.
Yes, you can, but you must each make your own election if you and a roommate each use a separate part of your home for a business that meets the criteria for this deduction.
The home office deduction can be a valuable tax break, so be sure to explore whether you’re eligible. If you need support in claiming your home office deduction, TaxAct is a great tool to use.