Can I Deduct Home Office Expenses?
For over two years now, many more people have been working from home than prior to the pandemic. And while some places of business have opened back up, there are still many people who are working remotely. Some are self-employed, some are independent contractors, and some are employees who have not yet gone back to the office. With all these people working where they live, we are being asked more frequently about home office expense deduction.
Can you deduct home office expenses? And how do you deduct home office expenses? The answers depend on what kind of worker you are, how you use the space for which you want to deduct expenses, and more.
Requirements to Take Home Office Expense Deduction
Taking a home office expense deduction requires more than occasionally using the desk in your home’s guest room for a Zoom conference call for work or filling out a report. Let’s discuss what the IRS requires for you to claim this deduction on your income taxes
Regular and Exclusive Use
Is there a part of your home that you use just for conducting business? Do you use that space for work on a regular—not just an occasional—basis? If so, you may be able to take a home office expense deduction for that space.
The space you claim might be an office where you process paperwork. But it might also be a basement in which you have a barber chair or run a licensed daycare, or a detached workshop on your property in which you do woodworking and sell finished pieces to customers. As long as you regularly and exclusively use that space for business, you may be able to deduct it.
If you “flex” the space for both business and personal use, it fails the “exclusive use” test. There are some exceptions to this rule. For instance, if you use the space to store inventory or product samples, you may still be able to deduct expenses for it if other requirements are met.
Principal Place of Business
In order to deduct home office expenses, you must also use your home as your principal place of business. You may be able to also conduct some business elsewhere; your home doesn’t have to be the only place you work. But it must be a place where you substantially and regularly conduct business. If you work at home sometimes simply because it’s convenient to do so, but your principal place of business is elsewhere, you cannot deduct expenses for a home office.
If your workspace on your home property is a separate structure from the one in which you live, you may be able to deduct expenses even if it is not your principal place of business; speak to a tax professional about the specific requirements.
Nature of Employment
If you meet the requirements above, you are well on your way to being able to deduct home office expenses. However, there is one more requirement you still have to meet. You can claim this deduction if you are self-employed, a gig worker, or an independent contractor whose income is reported on Form 1099.
If you are an employee who gets a paycheck and whose income is reported on a W-2, you are ineligible to take a home office expense deduction, even if you meet the other requirements. Employees were, until fairly recently, able to deduct home office expenses. However, the Tax Cuts and Jobs Act of 2017 (TCJA) changed that.
How Do You Claim a Home Office Deduction?
If you are eligible to claim a home office deduction on your income tax return, there are two ways in which to do so. The simpler of the two is just to deduct $5 per square foot of your home office space, up to a maximum of 300 square feet. The maximum deduction for this method is $1500. That generally translates into an actual tax savings of a little over $500.
The more potentially lucrative way of claiming a home office deduction is also, unsurprisingly, more effort. You must document your actual expenses for your home office. Depending on your circumstances, this might be much more than $1500, so it could be well worth the additional work to keep track of.
You may even be able to deduct a part of your rent or mortgage and utilities for your home office, based on the size of your work space relative to the home itself. If your home is 2500 square feet, and your office is 250 square feet, for example, you might be able to deduct 10% of those expenses. You can learn more by reviewing IRS publications for allowable expenses for business use of your home or speaking to an experienced tax professional.
The Bottom Line
Small business owners and self-employed workers deserve every financial break they can get. If you want to learn more about how to deduct home office expenses, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.