Whether you're temporarily working from a home office due to the pandemic or have worked full-time from home for years, you may wonder what kinds of related expenses you can deduct to lower your taxable income and thus cut your taxes due. After all, you likely deal with many home expenses like rent, insurance and utilities that you pay for out of pocket.
The Internal Revenue Service allows for a home office deduction for taxpayers. Still, your employment status, home office space and other factors determine whether you qualify and what you can actually deduct. Here's a thorough guide to getting a tax deduction for your home office.
Overview of Home Office Deduction
The home office deduction serves as a way to help account for the many direct and indirect costs involved with working from a home office as your principal place of business. Direct costs include those that only impact your home office space rather than the whole home, including repairs and maintenance for that work area. Indirect costs are much more varied and include things like utility services, mortgage interest, rent and depreciation of your home.
While direct expenses are often fully deductible, the IRS requires a prorated approach for indirect ones. Unrelated expenses (like lawn work) aren't part of the home office deduction.
While this deduction doesn't reimburse you for the full amount of all those expenses, the deduction can help reduce your taxable income, so you get a lower tax bill or even a tax refund that year. However, keep in mind that you won't get to deduct more than you actually made in income.
The IRS offers two home office deduction calculation methods that differ in complexity and your potential deduction amount. For example, one involves a quick calculation based on the space's square footage, while another involves a form full of calculations. But before you can qualify to take either method, you have to ensure that your work situation and home office meet certain IRS criteria, as not everybody who works from home part or all of the time will meet the requirements.
Read More: Can I Deduct My Rent on My Tax Return?
IRS Definition of Home Office
Your home office could range from a small space in the corner of your spare bedroom or living room to a dedicated den or even a shed in your backyard. The IRS is particular on what it considers an eligible home office for the home office deduction, specifically its exclusive use requirement. This typically means that your home office space can't be used at any time for any other purpose and can only have business furniture and other work items there. However, it doesn't have to be a whole room, so you could permanently mark off part of a room as your home office and qualify, but you couldn't use your kitchen table as a home office space since it would also be used for personal reasons.
Do know that the IRS does make a few exceptions to this rule on exclusive use. For example, you could still qualify as long as you've got the proper licensure and use shared spaces in the house to take care of children, the elderly or people with disabilities. Further, you could still qualify if your home office space is used for storing your inventory regularly and there's no offsite location where you also have inventory.
Along with meeting this requirement, you need to use that home office space on a regular basis (occasional or incidental work sessions don't count). This could mean you work full-time from the space, use it for meeting your clients regularly or otherwise use the area as your primary business space. It could also mean that your home office is where you handle managerial and administrative tasks, even if you conduct your work off the property, as long as you also don't rent separate office space elsewhere.
Self-Employed Vs. Employee Eligibility
Along with meeting the exclusive use criteria for your home office, you need to consider your employment status to determine whether you're allowed to take a home office deduction at all. Specifically, you need to identify whether you work as an employee for a company or whether you're self-employed in your line of work. To meet the IRS criteria in 2020, you need to be self-employed. You won't get a deduction as an employee, even if your employer doesn't decide to reimburse any costs associated with working from home.
Prior to the Tax Cuts and Jobs Act, which will last through 2025, regular employees used to be able to deduct certain unreimbursed work-related costs as long as they added up to at least 2 percent of their adjusted gross income. This would have included things like office supplies, books and equipment that your employer deemed necessary. Now, you need to speak with your employer about getting some reimbursement since you can't claim these items on your taxes anymore.
If you're self-employed, you can have full access to the home office deduction as long as your work area meets the criteria the IRS has set forth for a home office. You also need to prove that your home office expenses are reasonable for your line of work. For example, deducting standard costs like electricity and home insurance is reasonable for various self-employed roles like real estate agents, insurance salespeople and writers.
Read More: Independent Contractor Tax Deductions
Understanding the Simplified Method
If you have a small home office space and meet all the criteria mentioned so far, then you might find the quickest and easiest way to take the home office deduction is to use the simplified method. This method works as long as your home office space doesn't take up more than 300 square feet, so you need to measure the square footage to ensure you meet this requirement. This option may be ideal when you don't want to worry about pulling out old receipts or trying to prorate things like utilities yourself. However, the simplified method gets rid of the option to deduct your home's depreciation.
With this method, you could deduct $5 per square foot in 2020 in most situations. This means that the most you can get from this method is $1,500 for a 300-square-foot home office.
However, the IRS uses a different calculation for daycare services, where you first divide the daycare service hours in the year by the total hours in the year and then multiply that by $5 to get an adjusted rate. For example, if there were 8,760 hours in the year, and you offered daycare for 1,560 of them in a space of 300 square feet, your adjusted rate would be 89 cents per square foot. When multiplied by the square footage of your home office space, that adjusted rate means an estimated $267.12 deduction.
Exploring the Actual-Cost Method
As appealing as the simplified method might sound, it might not fit your situation, and you could benefit from putting in some extra time and work to use the actual-cost method. For example, you wouldn't have another option if you had a large home office space of 500 square feet. On the other hand, you might have a small space that qualifies for the simplified method, but you don't feel satisfied with the maximum deduction since you had many large expenses during the tax year.
With this method, you first need to determine what percentage of your house that your home office space occupies. For example, if you have a 2,400-square-foot home with a large 600-square-foot home office space for a design job, then you'd get 25 percent. Daycare centers have a more complex calculation as it considers the number of hours when you offered services that tax year. You divide your actual service hours by 8,760 for a full year of work, and then you multiply that by the percentage of space your home office occupies to get a new value to use moving forward.
You then need to locate receipts and other documentation for each indirect and direct expense to determine the amounts spent. For direct expenses, you can deduct the whole cost, but you need to multiply indirect expenses by the percentage your home office space takes up to get a prorated value to deduct. For example, if your indirect expenses add up to $2,000 and the calculated home office percentage is 20 percent, then you'd get a $400 deduction. Further, you need to know information about your home's value and check the IRS table for depreciation percentages so you can account for your home's depreciation.
Filling Out Relevant Tax Forms
Whether you use the simplified or actual-cost method for figuring your home office deduction, you enter the amount on your Schedule C when you do your tax return. However, the steps for completing your tax forms differ for these deductions, as the actual-cost method requires filling out an additional form in detail to document various items about your home office space, direct and indirect expenses, home depreciation and any carryover of unallowed expenses.
If you're using the simplified method, you'll locate box 30 on Schedule C. In fields 30a and 30b, you will provide your home's total area in square feet along with the percentage you determined for your home office space. You then put your deduction, up to a maximum of $1,500, in the main box on the right.
When using the actual-cost method, you need to first complete Form 8829, Expenses for Business Use of Your Home, where the first section determines the business percentage of your home. The second part has you list all your direct and indirect expenses, calculate your home's depreciation and account for things like carryover expenses and casualty losses. The third and fourth parts help you calculate depreciation and carryover expenses. After you're done, you'll take the number from box 36 of Form 8829 and put it on box 30 of your Schedule C.
Read More: How to Organize Schedule C Tax Information
Deducting Other Business Expenses
As you've seen, the home office deduction helps account for many expenses that come with maintaining and residing in your home to work. Still, as a self-employed person, you can also take advantage by writing off several other business expenses on Schedule C. Whether an expense is partially or fully deductible depends on whether the cost is wholly for your business or an expense where there's some non-business use. And again, these expenses need to be reasonable and ordinary for your kind of profession.
For example, if you bought a new $1,200 computer for your home office that you only use for work, you could likely claim the entire amount as an equipment expense, but if you use that same computer 50 percent of the time for personal use, then you could only write off $600 of the cost. The same need to prorate expenses often applies to things like your cell phone service and car expenses.
Other examples of potential business expenses include your health insurance premiums, business services obtained, mileage, business insurance fees, professional development activities and travel and meal expenses. You can check IRS Publication 535 for a detailed guide on the types of business expenses you can report and any specific rules on them.
- NerdWallet: The Home Office Tax Deduction for Small-Business Owners
- Internal Revenue Service: Home Office Deduction
- Internal Revenue Service: Form 8829
- Internal Revenue Service: Publication 587 (2018), Business Use of Your Home
- TaxAct: How Tax Reform Changed Deducting Unreimbursed Job Expenses
- H&R Block: Home Office Deduction Requirements
- Internal Revenue Service: FAQs - Simplified Method for Home Office Deduction
- Internal Revenue Service: Schedule C
- Stride: Top 10 Deductions (+13 More You Probably Didn’t Know About)
- Internal Revenue Service: Publication 535 (2019), Business Expenses
- Internal Revenue Service. "Topic No. 509 Business Use of Home." Accessed Feb. 12, 2020.
- Internal Revenue Service. "Publication 587: Business Use of Your Home (Including Use by Daycare Providers," Page 2. Accessed Feb. 12, 2020.
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- Internal Revenue Service. "Publication 587: Business Use of Your Home (Including Use by Daycare Providers," Page 3. Accessed Feb. 12, 2020.
- Internal Revenue Service. "Publication 587: Business Use of Your Home (Including Use by Daycare Providers," Page 6. Accessed Feb. 12, 2020.
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- Internal Revenue Service. "FAQs - Simplified Method for Home Office Deduction." Accessed Feb. 14, 2020.
- Internal Revenue Service. "Publication 587: Business Use of Your Home (Including Use by Daycare Providers," Page 10-11. Accessed Feb. 12, 2020.
- Internal Revenue Service. "Publication 587: Business Use of Your Home (Including Use by Daycare Providers," Page 11. Accessed Feb. 12, 2020.
- Internal Revenue Service. "Publication 587 Business Use of Your Home (Including Use by Daycare Providers," Pages 11-12, 26. Accessed Feb. 14, 2020.
- Internal Revenue Service. "Publication 5307: Tax Reform Basics for Individuals and Families," Page 5. Accessed Feb. 14, 2020.
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.