If you are a sole proprietor or single-member LLC and use your home as your office, you could qualify for a home office tax deduction. For example, if you use 15% of your home as an office, you can write off up to 15% of your household bills, such as utilities, insurance, and general repairs.
There are two methods that the IRS allows you to use when calculating your home office tax deduction; the simplified method and the regular method. For both methods, you will need to know the square footage of your home as well as the square footage of the space that you use as your home office. Before you roll up your sleeves and start crunching numbers, the IRS requires you to pass a couple of qualification tests, which we will discuss next.
How to Qualify for the Home Office Tax Deduction
When qualifying for the home office tax deduction, the IRS has established two tests that you must pass. The first is the regular and exclusive test, and the second is the principal place of business test. You’ll need to pass both in order to qualify for the simplified as well as the regular deduction method.
To qualify for the home office tax deduction, you must meet the following 2 tests:
1. Regular and Exclusive Use Test
To meet this test, you must regularly use part of your home exclusively for your business. For example, if you have an extra room that you use to run your business and not for any other purpose, then you have met the regular and exclusive use test. A specific area of your home that is not a separate room but is used exclusively for business also qualifies.
If you have a seasonal business that you operate for just part of the year, you are eligible to take this deduction for the portion of the year that you use the space for your business. For example, if you sell holiday gift baskets from September thru December, then you are eligible to deduct the space used for this business for the 4 months that you are in operation.
As with most IRS rules, there are a couple of exceptions to the regular and exclusive use test. You do not have to meet the exclusive use test if either of the following apply:
- Part of your home is used to store inventory or product samples
- You use part of your home as a daycare facility
2. Principal Place of Business Test
To meet the requirements of this test, you must prove that you use your home as your principal place of business. You can have more than one place where you conduct business, but in order to be eligible for the home office deduction, you need to conduct the majority of your business tasks like meeting clients and conducting administrative tasks at your home office.
In addition, you cannot have another location where you conduct substantial administrative or management tasks. Here are a few examples of what the IRS considers to be administrative or management activities:
- Invoicing customers
- Scheduling appointments
Below is an example from IRS Publication 587 of a self-employed plumber who meets the requirements of the home office deduction:
Home Office Deduction Example
John is a self-employed plumber. Most of John’s time is spent at customers’ homes and offices installing and repairing plumbing. He has a small office in his home that he uses exclusively and regularly for the administrative or management activities of his business, such as phoning customers, ordering supplies, and keeping his books.
John writes up estimates and records work completed at his customers’ premises. He does not conduct any substantial administrative or management activities at any fixed location other than his home office. John does not do his own billing. He uses a local bookkeeping service to bill his customers.
John’s home office qualifies as his principal place of business and can deduct expenses for its use. He uses the home office for the administrative or managerial activities of his plumbing business, and he has no other fixed location where he conducts these administrative or managerial activities. His choice to have his billing done by another company does not disqualify his home office from being his principal place of business.
Refer to IRS Publication 587 Business Use of Home to see more home office deduction examples like this.
Types of Home Office Expenses You Can Deduct
Here are some examples of the home office expenses you can deduct:
- Repairs and maintenance to the area used for business
- Real estate taxes
- Deductible mortgage interest
Depending on how you calculate your home office deduction, you may have to categorize certain business expenses. Below, you will find a quick reference chart that you can use to determine what type of expenses qualify for the home office tax deduction.
Types of Business Expenses That Are Eligible for Home Office Tax Deduction
|Direct||Expenses only for the business part of your home (e.g. repairs or improvements made to the space that you use for your office).||100% Deductible|
|Indirect||Expenses for keeping up your entire home (e.g. insurance, utilities, general repairs).||Deductible based on the percentage of your home used for business. For example, if my home office space is 10% of the total square feet of my home then I can deduct up to a maximum of 10% of indirect expenses.|
|Unrelated||Expenses for the areas of your home that are not used for business (e.g. lawn care, pool service, etc).||Not deductible|
One of the reasons why many business owners do not bother to take the home office tax deduction is because it required you to compute the actual expenses of your home office, which made it very complicated to calculate. Beginning with the 2013 tax year, the IRS offered a new simpler method to calculate the home office tax deduction in addition to the regular method.
1. Simplified Method Home Office Tax Deduction
To calculate the home office deduction using the simplified method, you need the following information:
- The square footage of the area of your home that you use for business, not to exceed 300 square feet. For tax purposes, this is called the allowable area.
- The gross annual income of your business. You should be able to get this information from your profit and loss statement for the current tax year.
- Your total annual business expenses (not related to the use of your home – e.g. you would not count utilities and rent). You should be able to get your total expenses from your profit and loss statement for the current tax year.
Home Office Deduction Example Calculation – Simplified Method
Once you have computed the allowable area, your gross income, and total expenses, follow the steps below to calculate your home office deduction:
1. Multiply the allowable area (mentioned above) by $5.00 (if you are a Daycare, see IRS Publication 587 for special rules that apply). For my home office, I have an allowable area of 250 square feet. I will multiply 250 by $5, as indicated below:
- 250 x $5 = $1,250
2. Take your gross business income and subtract your total business expenses. If total expenses exceed income, then you are not eligible to take the home office deduction. According to my profit & loss statement, my gross income is $10,000, and my total expenses are $4,000. Calculate the difference between these two figures as indicated below:
- $10,000 – $4,000 = $6,000
3. If the difference between your income and expenses is a positive number (like we have in this example) then proceed to step 4. However, if your total expenses exceed your gross income (resulting in a negative number) then you do not qualify for a home office tax deduction.
4. Take the smaller of the results between items #1 or #2, and this is the amount you are allowed to deduct for your home office expenses. My result for item #1 was $1,250 and for item #2 it was $6000. Therefore, my home office deduction is $1,250, which is the lesser of the two.
2. Regular Method Home Office Tax Deduction
If you do not meet the requirements to take the home office deduction using the Simplified Method because your expenses exceed your income, then you can use the Standard or Regular Method to see if you qualify to take the deduction. While the regular method requires a bit more work to calculate, it could give you a larger deduction because it is based on actual expenses as opposed to just a formula based on the square footage of the space used.
For example, under the Simplified Method, a business owner who lives in New York City with a 200 square foot home office and another business owner who lives in Boise, ID with a 200 square foot home office would both end up with the exact same deduction, assuming that their gross income is more than $1,000:
- 200 x $5 = $1,000
Since it is a lot more expensive to live in NYC, it generally might work in the NY taxpayer’s favor to use the Regular Method, which is based on actual expenses.
Home Office Deduction Example Calculation – Regular Method
Follow the steps below to calculate your home office tax deduction based on the Regular Method:
1. Calculate the percentage of your home that is used exclusively for business. If you have a 2,000 square foot home and your home office is 200 square feet, then the percentage of your home office space is calculated as follows:
200/2000 = 10%
2. Categorize all expenses to determine deductibility. The IRS has categorized expenses into 3 types: Direct, Indirect, or Unrelated. Reference our table above to see what types of expenses fall into each category.
Similar to the Simplified Method, if your total gross income exceeds your total expenses, then you can deduct all of your direct expenses and indirect business expenses related to the use of your home office under the regular method.
However, if your total business expenses exceed the gross income from your business, then your deduction for certain expenses for the business use of your home will be limited under the regular method. To learn more about these limitations, refer to IRS Publication 587.
Make tax time a breeze by using tax software like TurboTax. TurboTax will automatically calculate the home office tax deduction to ensure you take the maximum deduction possible. To learn more, check out our tax software guide for our top picks.
Home Office Deduction Form
Since the home office tax deduction is only available to self-employed businesses and single-member LLCs that file a Schedule C, you need to complete home office deduction Form 8829. Then, follow the instructions on the home office deduction form to transfer your home office deduction to the appropriate line on your Schedule C.
Home Office Deduction Form Documentation
You should keep on file any information that you used to calculate your home office deduction. In case of an audit, keep these records on file for at least 3 years after the date that you filed your tax return. If possible, scan these documents to your computer for safekeeping.
Here are the key documents and info you should keep to support your home office tax deduction:
- Cancelled checks (i.e. mortgage, rent payments)
- Copies of utility bills, insurance
- Receipts (repairs or improvements made to home)
- Square footage of the entire home
- Square footage used for your home office
For more tips on what documents to keep and how to go paperless, check out our small business bookkeeping guide.
”When tracking expenses and keeping records related to your home office deduction, remember to separate anything business related from your personal expenses. For example, your monthly cable television expense should be separated from the monthly charge for internet access since internet access can be business related, while cable charges are generally not. Same goes for family members that share a cell phone plan with you.” — Michael Ly, CEO, Reconciled It
While it’s not rocket science, calculating your home office tax deduction can be a bit cumbersome; not to mention the likelihood of miscalculations if you’re trying to do this manually. To help you keep track of your expenses and the key documents we have discussed, we recommend QuickBooks.