Who Can Take the Home Office Tax Deduction?

Do you qualify for the home office tax deduction? And, if you are qualified, should you take the deduction for working from home? Here’s an explanation of the rules and the methods for deducting at-home business expenses.

Wondering what the home office deduction is and whether it’s something you should take or not? 

The home office deduction is a tax deduction that lets taxpayers who qualify deduct certain expenses for the business use of their home on their tax return. It’s not a new deduction, but many people who are working from home for the first time because of the COVID-19 pandemic wonder if they’ll be entitled to the home office deduction on their income tax return. 

Here’s information to help answer your questions. We’ve included a brief overview explaining what it is, how you qualify for it, and information about the regular and new simplified option for claiming a deduction for the business use of your home on your annual income tax return.

What is the home office deduction?

The home office deduction is a deduction that allows qualified individuals to deduct a portion of the cost of running their home as a business deduction. It applies to expenses such as mortgage interest, real estate taxes, utilities, and repairs. Individuals who rent a home or apartment and work from their home may also qualify for the deduction.

The home office deduction is separate from and in addition to any deductions the business is entitled to for everyday business expenses. Because it gets deducted from your business income, it reduces the amount of profits that gets recorded as personal income on Form 1040 and reduces the amount of income subject to self-employment tax (the self-employed version of Social Security) on the business portion of your return.

Who can take the home office deduction?

To take the home office deduction, you must be self-employed or a partner who works from home and you must meet the eligibility requirements described below.

Employees are not eligible to take the deduction. If you’re an employee who’s required to work from home, your employer may reimburse you for those costs, however. (The employer, in turn, can deduct the expenses they paid to reimburse you.) And if you’re an employee of your own one-person corporation, the corporation can reimburse you for “accountable” expenses for your home office provided you have no other business location.

The two general requirements to qualify to deduct expenses for business use of your home are:

1. You must use the space regularly and exclusively for business. Your home office won’t qualify for the deduction if you only use it occasionally to catch up on work when you’re home or as an alternative to going into your main location if your kids are sick or out of school. “Exclusively” means that your home office can’t double as the guest bedroom, or be used by the kids to do their homework, or by your spouse to manage your investments or the records for the little league team they coach.

2. The space must be either your principal place of business or a place where you meet or deal with patients, clients, or customers in the normal course of your business. Consultants, physicians, and others who deliver services at locations other than their home office but who conduct the vast majority of their managerial and administrative tasks at an office in their home may also qualify as using the home as their principal place of business.

Daycare businesses can qualify for the home office deduction even if the space is not used exclusively for the business. Business owners who use their home to store inventory or product samples or who have a separate structure on their property that they use for business may also qualify for the deduction. See IRS Publication 587, Business Use of Your Home for further information.

How to Take the Home Office Deduction

If you qualify for a deduction for the business use of your home, you have a choice of two methods to declare it on your tax return. You can use either the regular method determining the deduction or a new, simplified method.

RELATED: How to Pay Yourself When You’re a Sole Proprietor

Regular Method

With the regular method, you have to keep records of the actual expenses for running your home and split the allowable expenses between business and personal use. Any home expense that is directly attributable to the business (example: the cost of painting the room you use for your home office) is fully deductible.

Indirect expenses such as mortgage interest, mortgage insurance, real estate taxes, utilities have to be prorated between personal and business use based on the percentage of your home being used for your home office. So, if your home office occupies 100 square feet and your home is 2000 square feet, you’d be able to deduct 5% of the allowable indirect expenses as a home office deduction and the remaining 95% of mortgage interest and taxes on the personal portion of your return. Using the regular method for calculating the home office deduction, you can also take a deduction for depreciation on the house, but that depreciation gets reclaimed when you sell your home.

Expenses that have nothing to do with your home office (example: painting your living room) are not deductible. See IRS Publication 587, Business Use of Your Home for further information.

Related: Tax Deductions for Self-Employed Business Owners

Simplified Option

The simplified option is like a breath of fresh air for many people who run home offices. Instead of all the tedious recordkeeping requirements and calculations, the simplified option lets you take a deduction of $5 per square foot of your home office up to a maximum of 300 square feet ($1,500). Homeowners using the new option cannot depreciate the portion of their home used in a trade or business. However, real estate taxes and mortgage interest you paid out as a homeowner are not figured into the home office deduction and are fully deductible on the personal part of your return.

Which method should you use? This IRS comparison chart is a helpful guide:

Source: IRS

Should you take the home office deduction if you qualify?

Some people worry about taking the deduction for running their business from home because they fear it will cause their tax return to be pulled for an audit. The rules for qualifying have eased somewhat in recent years, so if you qualify for the deduction, it’s worth considering and discussing with your accountant. Additionally, the IRS has made it much easier than in years past to file for the deduction.

Remember, whether or not you choose to take the home office deduction, you’re still entitled to deduct the regular and necessary business expenses you incur during the year, such as your costs for advertising, promotional materials, paper, office supplies, and other costs of doing business.

For more information, see IRS Publication 587, Business Use of Your Home, available at http://www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.