If you work from your home and have a dedicated home office you use, then you may be entitled to the home office deduction, which could save you hundreds or even thousands of dollars on your tax return. Here's what the IRS considers to be a "home office," how much your deduction could be, and how to claim it on your tax return.
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Who can take the home office deduction?
In order to take the home office deduction, you need to meet two main requirements.
First, the part of your home you claim must be used exclusively for conducting your business. If you have a laptop sitting on your dining room table, that doesn't mean your dining room is now your "home office." It's still a dining room in the eyes of the IRS. This doesn't necessarily mean that your office needs to be a separate room -- just a defined space that is solely for business purposes.
Second, you need to be able to demonstrate that your home serves as your principal place of business. For example, I write roughly 90% of my articles in my home office, so that would qualify as a principal place of business. If you also conduct business outside your home, you still might qualify as long as part of your home is used "exclusively and regularly" for your business.
Admittedly, there is some gray area with both requirements. Use your best judgement and consult a tax professional if you're not completely sure that you qualify.
How the home office deduction is calculated
Just like you have the choice between taking the standard deduction and itemizing deductions on your tax return, when it comes to the home office deduction, there are two methods you can use to calculate it -- one that's easy and one that's more complicated.
The easy method simply involves multiplying $5 by the square footage of your home office space, up to a maximum of 300 square feet. For example, if your home office is 10 feet by 20 feet (200 square feet), then your home office deduction using the simplified method would be $1,000.
The other method involves adding up the actual expenses (or portion of expenses) your office represents. This includes not only the money you spent on the office itself, such as painting supplies, but also a proportional share of the home's expenses. This can include but is not necessarily limited to:
- Mortgage interest and mortgage insurance
- Rent
- Casualty losses
- Homeowners' insurance
- Property taxes
- Utilities, such as electricity, water, gas, sewer, and garbage
- Pest control services
- Alarm system costs
- Whole-home repairs, such as a new HVAC system
- Depreciation
As a simplified example, let's say you have a 2,000-square foot home, and a 200-square foot room is used exclusively as a home office -- that's 10% of the home's total square footage. Here's an example of how this deduction could work.
|
Expense |
Total Annual Cost |
Deductible Amount |
|---|---|---|
|
Mortgage Interest |
$5,000 |
$500 |
|
Insurance |
$1,000 |
$100 |
|
Real estate taxes |
$3,000 |
$300 |
|
Utilities |
$3,000 |
$300 |
|
Whole-home repairs |
$5,000 |
$500 |
|
Depreciation |
$5,000 |
$500 |
|
Pest control |
$400 |
$40 |
|
Alarm system |
$300 |
$30 |
|
Office-specific repairs and improvements |
$500 |
$500 |
|
Total deduction |
|
$2,740 |
In this case, the more complex method would result in a much larger home office deduction. In my experience, while it's certainly more time-consuming, the longer method works out more favorably in most cases. However, it's worth mentioning that expenses such as mortgage interest and real estate taxes are deductible in their entirety regardless of which method you use, if you itemize deductions on your tax return.
How to claim the home office deduction
If you're self-employed and file Schedule C with your tax return, there's a line (line 30) where you can claim the business use of your home.
If you're an employee, and therefore don't fill out a Schedule C, you'll need to itemize deductions on Schedule A of Form 1040, where the home office deduction is claimed as an unreimbursed employee business expense. Be careful that you don't deduct the same expense twice when it comes to mortgage interest and property taxes.
A word of caution
As a final point, it's worth noting that the home office deduction is a major audit risk factor. The IRS tends to take a closer look at returns that claim the deduction, particularly because there's so much potential for abuse -- intentional or not.
Be sure your home office meets the requirements, and if you qualify, by all means take advantage of the deduction, as it's one of the most lucrative tax breaks available for self-employed individuals. Just be aware that doing so makes you a more likely audit target, so be sure you're prepared to prove that your home office is indeed an office and that all of your expense records are consistent with what you claimed on your tax return.
