What is a home office expense?
Home office expenses are expenses incurred in the course of operating a business or performing employment-related activities in a principal residence.
Key points to remember
- Expenses you incur in operating a home-based business are deductible from your federal taxes within certain limits.
- To calculate your expenses and deductions, you can either add up all your costs and calculate the percentage of your home dedicated to your business, or use a simplified method to perform the same calculation.
- The rules for deductions changed with the Tax Cuts and Jobs Act 2017, so be sure to get information on deductions released in 2018 or later.
Understanding Home Office Expenses
Home office expenses allow individuals to deduct certain housing expenses such as utilities, interest paid on property mortgage and property taxes on their annual tax return.
The IRS provides details of the home office deduction rules in Post 587.
Home office deductions
Expenses incurred by a business you run from your home are the basis for home office deductions that can reduce your tax bill if you are self-employed.
Any services or utilities used exclusively for business purposes can be fully deducted. This includes office supplies, telephone lines and computer equipment. The amount of deductions allowed will depend on several factors, including how a homeowner files their return and their income, but most will be able to claim multiple items as expenses as long as they are incurred in the normal course of business.
A home office will only qualify for home office deductions if it meets the following criteria:
- It is used exclusively and regularly as a principal place of business.
- It is used exclusively and regularly as a place where you meet or deal with patients, clients or customers in the normal course of your trade or business.
- This is a separate structure that is not attached to your home and is used in the course of your trade or business.
- It is used on a regular basis for certain storage purposes.
- It serves as a rental for your business.
- You use your house as a daycare center.
The rule of thumb is “exclusive and regular”: the place you designate as your home office must be used exclusively and regularly as your home office. In the words of the IRS, “The space need not be bounded by a permanent partition. You do not meet the requirements of the exclusive use test if you use the area in question for both professional and personal purposes.”
If you have a corner of your home with a desk that you only use for doing business, that is considered home office space, but if you conduct business on a laptop while sitting on your couch next to it of a family member who watches TV, you can’t claim the sofa as your home office.
How to Calculate Home Office Expenses
According to the IRS, there are two ways to calculate the portion of your home that constitutes a home office and the portion of your incurred expenses that are deductible. The first way (the “regular” method) is to calculate your actual expenses. The second method is called the “simplified” method, which is faster but may not give as many deductions.
The regular method
The method that uses an accounting of your actual expenses begins by calculating the following:
- Which of your business expenses are direct, indirect or unrelated.
- The percentage of your home used for commercial purposes.
Direct expenses are things like painting or repairs only in the area used for business. Indirect expenses are whole-house expenses like insurance, utilities, and general repairs that also benefit your home office.
To determine your home region’s allowable business percentage, the IRS offers two methods:
- Divide the square footage (length times width) used for business by the total square footage of your home.
- If the rooms in your house are all about the same size, you can divide the number of rooms used for business by the total number of rooms in your house.
The regular method requires keeping accurate records, but the IRS has a helpful spreadsheet to put taxpayers on the right track.
Deductions for limited household expenses
If your expenses are less than your gross income from the business carried on in your home, all of your expenses are deductible, but if your expenses exceed your gross income, only a portion of them can be deducted.
The simplified method
The simplified method was introduced in 2013 to simplify the calculation of allowable deductions for your home office. To calculate your deductions with the simplified method, you need to know:
- The authorized square footage of your home used in the conduct of the business. If you did not operate the business for the whole year in the house or if the area changed during the year, you will need to know the authorized area that you used and the number of days that you have performed the activity for each month.
- Gross income from commercial use of your home.
- The amount of your professional expenses that are not related to the use of your accommodation.
- If the qualifying commercial use is for a daycare that uses space in your home on a regular (but not exclusive) basis, you will also need to know the percentage of time part of your home is used for daycare.
Once you have this information, you can calculate your deduction by following these steps:
- Multiply the square footage allowed by $5 (or less than $5 if the qualifying commercial use is for a daycare center that uses the space in your home on a regular, but not exclusive, basis).
- Subtract business expenses that are not related to the use of the home from the gross income related to the business use of the home. If these expenses exceed the gross income from the business use of the home, you cannot claim a deduction for that business use of the home.
- Take the smaller of the amounts of (1) and (2). This is the amount you can deduct for this qualifying business use of your home under the simplified method.
Other rules apply that limit the reporter’s ability to use the simplified method. For example, if you share space with another person, you cannot both deduct the same space. Other restrictions are listed in Post 587.
Real-world examples of home office expenses
As an example, consider a freelance writer who operates his own business from his home. They have about 200 square feet of dedicated office space, a cell phone that’s only used for work-related calls, and a magazine subscription that provides editorial leads for writers. All of these are tax deductible as home office expenses, including the 200 square foot writer’s house, since that room is used for business purposes.
Additionally, the author can deduct the ink they use to print the contracts, the total cost of the all-in-one printer they had to purchase to be able to send those signed contracts, and any training related to the contract. industry he follows.
Real estate deductions are capped
Because the Tax Cuts and Jobs Act has limited the amount property tax filers can deduct, you cannot use the home office deduction to deduct your total property tax amount if it exceeds $10,000. $.
There are a variety of expenses that can be deducted when someone works from home, whether as a remote employee or because they are self-employed. A certified tax specialist can review available deductions and ensure that all items claimed are valid.
For example, if this freelance writer had no dedicated office space and worked at the coffee shop around the corner from his house every day, he could not claim the costs associated with utilities and the mortgage as part of his home office deduction. There may be additional deductions available to them, such as the coffee and donut they buy each day while working outside the store.