How is My Home Office Deduction Related to My Business Legal Type?

Your Home Office Deduction and Business Legal Type
Your Home Office Deduction and Business Legal Type. Hinterhaus Productions/Getty Images

Home Office Deduction and Business Taxes

Working from your home as a business owner? You may be able to get a tax deduction for your home office expenses, if you can qualify. How you report the expenses and the types of expenses you can claim for your home office depend in part on the legal type of your business.

For all types of businesses

In every type of business, you (as business owner or employee) can deduct home office expenses only if the space meets the "principal place of business" test.

If you conduct your business in more than one location, you must consider the relative importance of each location and the amount of time spent at each location. The most important criterion to be able to deduct home office expenses, is that the space you claim must be used both regularly and exclusively for business purposes.

Calculating Your Home Office Space 

To calculate your home office space for expense deduction purposes, you can use the percentage method (dividing the home office square footage by the total home square footage) or, if all rooms are approximately equal, divide the number of rooms used for business by the total number of rooms. You don't have to use an entire room for your home office; you just need to be able to separate that area from other uses and show that it is being used exclusively for business purposes.

Businesses that use Schedule C for business taxes

If you use Schedule C to determine your business taxes, you can use Form 8829 to calculate your home office deduction.

Only sole proprietors and single-member LLC owners can file business taxes on Schedule C.

In addition, home office expense deductions for business owners filing on Schedule C are limited; you cannot create a business loss with these expenses.

Read more about how to use Form 8829 to calculate your home office expenses.

Owners/Officers of corporations

If your business is a corporation or S corporation, and you are an officer of the corporation, you are paid as an employee. Employees can deduct some home office expenses if:

  • Your business use of your home is for the convenience of your employer, and
  • You do not rent any part of your home to your employer and use that part of your home for business purposes.

The "convenience of employer" test is not a clear-cut rule; it depends on the circumstances. But, in general the employer should require the use of the home office and it is difficult to prove if the employee has an office at the business location. If your corporation is home-based, it should be reasonable to demonstrate that your home office expenses are deductible.

It may be possible to deduct expenses the business use of your home as an S corporation employee, but it's tricky. Your best bet is to talk to your tax professional. 

Partners in partnerships/Multiple-member LLCs

If your business is a partnership or multiple-member LLC (taxed as a partnership), you may be able to claim a home office space deduction on the same basis as employees of corporations. The IRS says: 

"You may be allowed to deduct unreimbursed ordinary and necessary expenses you paid on behalf of the partnership (including qualified expenses for the business use of your home) if you were required to pay these expenses under the partnership agreement."

Home office expense deductions for employees and partners

Employees and partners can claim some home office expenses as personal expenses, using Schedule A on the individual's personal income tax return. The deductions are more limited than for business owners filing on Schedule C.

William Perez, Guide to Tax Planning, says that, as an employee, you may be able to deduct a percentage of your rent or mortgage and utilities, if you have not been reimbursed by the corporation.

To help you determine what home office expenses you can deduct as an employee or partner, IRS Publication 587: Business Use of Home has a worksheet that takes you through the process of determining what you can include on Schedule A.

For more information on business use of your home and home offices

Disclaimer: The information on this site is intended provide a general overview of a topic, with further resources you can consult. The author is not a CPA or attorney and this information is not intended to be legal advice. Every situation is different. Before you make any tax decisions, check with your tax advisor.