Whether you're temporarily working from a home office due to the pandemic or you've worked full-time from home for years, you may wonder what kinds of related expenses you can deduct to lower your taxable income and 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, but 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 home as your principal place of business. Direct costs include those that impact only your home office space rather than the whole home. They include 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.
Direct expenses are often fully deductible, but the IRS requires a prorated approach for indirect ones. Unrelated expenses (like lawn work) aren't part of the home office deduction.
This deduction doesn't reimburse you for the full amount of all those expenses, but it can help reduce your taxable income, so you'll have a lower tax bill or even a tax refund that year. But keep in mind that you can't deduct more than you actually earned in income.
The IRS offers two home office deduction calculation methods. They differ in complexity and your potential deduction amount. One involves a quick calculation based on the space's square footage, while another involves a form full of calculations. But you have to ensure that your work situation and home office meet certain IRS criteria before you can qualify to take either method. Not everybody who works from home part-time or full-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.
Exclusive use typically means that your home office space can't be used at any time for any other purpose. You can have only business furniture and other work items located there. But it doesn't have to be a whole room. 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 because it would presumably also be used for personal reasons.
The IRS does make a few exceptions to this rule on exclusive use, however. 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. You could also 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 must use your home office space on a regular basis. Occasional or incidental work sessions don't count. This could mean that 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 have to consider your employment status to determine whether you're allowed to take a home office deduction at all. You must identify whether you work as an employee for a company or whether you're self-employed in your line of work. You must be self-employed to meet the IRS criteria in 2021. You won't get a deduction as an employee, even if your employer doesn't 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'll have to speak with your employer about getting some reimbursement because you can't claim these items on your taxes anymore.
You have full access to the home office deduction if you're self-employed as long as your work area meets the criteria the IRS has set forth for a home office. You must also be able to prove that your home office expenses are reasonable for your line of work. 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
You might find that 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. You'll get less of a deduction if it's larger, and the simplified method doesn't give you the option of deducting your home's depreciation. But it may be ideal if your work area is on the small side and you don't want to worry about pulling out old receipts or trying to prorate things like utilities yourself.
Measure the square footage of your office area. You can deduct $5 per square foot for the 2021 tax year. This means that the most you can get from this method is $1,500 for a 300-square-foot home office because IRS rules cap this deduction at 300 square feet.
But the IRS uses a different calculation for daycare services. In this case, you would first divide the daycare service hours in the year by the total hours in the year. Then multiply that by $5 to get an adjusted rate. Your adjusted rate would be 89 cents per square foot 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. That adjusted rate means an estimated $267.12 deduction when it's multiplied by the square footage of your home work space.
Exploring the Actual-Cost Method
As appealing as the simplified method might sound, it might not fit your situation. You could benefit from putting in some extra time and work to use the actual-cost method. Even if you have a small space that qualifies for the simplified method, you might not feel satisfied with the maximum deduction because you had many large expenses during the tax year.
You must first determine what percentage of your home that your work space occupies. It would be 25 percent if you have a 2,400-square-foot home with a large 600-square-foot home office space. Daycare centers again have a more complex calculation. It considers the number of hours when you offered services that tax year. You would divide your actual service hours by 8,760 for a full year of work, and then you would multiply that by the percentage of space your home office occupies to get a new value to use moving forward.
Now you must gather receipts and other documentation for each indirect and direct expense to determine the amounts you spent. You can deduct the whole cost of direct expenses, but you must multiply indirect expenses by the percentage that your home office space takes up to get a prorated value.
You'd get a $400 deduction per month if your indirect expenses add up to $2,000 a month and your calculated home office percentage is 20 percent. But that still adds up to $4,800 for the year, which might be a good bit more than what the simplified option would give you.
Gather information about your home's value and check the IRS table for depreciation percentages so you can account for your home's depreciation because it's deductible with this option.
Filling Out Relevant Tax Forms
You'll enter the amount on Schedule C when you prepare your tax return whether you use the simplified or actual-cost method for figuring your home office deduction. But the steps for completing your tax forms differ for these deductions. The actual-cost method requires filling out an additional form, Form 8829, Expenses for Business Use of Your Home, to document various items about your home office space, direct and indirect expenses, home depreciation and any carryover of unallowed expenses.
The first section of Form 8829 determines the business percentage of your home. The second part requires that 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. Take the number from box 36 of Form 8829 and enter it in box 30 of your Schedule C.
You'll simply provide your home's total area in square feet along with the percentage you determined for your home office space in box of Schedule C. You put your deduction, up to a maximum of $1,500, in the main box on the right.
Deducting Other Business Expenses
The home office deduction helps account for many expenses that come with maintaining and residing in your home to work. But you can also take advantage by writing off several other business expenses on Schedule C if you're self-employed. 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 as well. These expenses must be reasonable and ordinary in your kind of profession.
You could likely claim the entire amount as an equipment expense if you bought a new $1,500 computer for your home office and you use it only for work, but you could only write off $750 of the cost if you use it 50 percent of the time for personal reasons. 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. Check IRS Publication 535 for a detailed guide on the types of business expenses you can report and any specific rules on them.
- 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
- 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
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.