What Are Home Office Expense Deductions?

Learn What Qualifies as Home Office Space and How to Calculate a Deduction

professional woman doing paperwork
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The home office expense deduction is a good one -- it can save you some significant money at tax time if you're self-employed and work out of your home, but it's not for the faint of heart. In fact, it's complicated enough that the Internal Revenue Service has dedicated a 32-page book (Publication 587) to explaining its intricacies.

Who Can Claim the Home Office Expense Deduction?

It's not enough that you take care of business bookkeeping in your den most evenings.

If your kids are sprawled on the sofa next to you and your laptop, you can't claim a home office expense deduction because the space in question must be used exclusively for business purposes. Think a spare bedroom you've dedicated entirely to your work, or the garage you've adapted to a workshop with no room left over to park your car. This doesn't mean your children or spouse can't enter your work space, but the interruptions should be no more than they might be if you worked off-premises. 

The space must be your "principal place of business." You run your operation from this location. If your work involves meeting with clients or customers at their locations, this is permissible if you always return to your home work area to deal with the logistics of running your operation -- invoicing clients, scheduling appointments and paying your business's bill. Of course, if you actually meet with clients, customers or patients in your home office, all the better.

 

The Easy Way to Calculate Your Home Office Expense Deduction 

You have two options for calculating the amount of your deduction. One is far easier than the other, but you might shortchange yourself if you use it. The IRS offers a simplified option which may be appropriate if your home office is on the small side, up to 300 square feet.

Multiple the area by $5 per square foot. There's your deduction. Obviously, the smaller your space, the less of a deduction you'll get. 

Read more about the details of the simplified home office deduction if you think this option might be right for you. 

Claiming the Home Office Expense Deduction the Old Way

The simplified option has been available since 2013. Before that, home office entrepreneurs had to go through some complicated calculations to arrive at their deductions, and you might still want to do this because it could ultimately save you more money. 

Use Form 8829 to calculate your home office deduction. This requires that you determine the percentage of the total area of your home, then the area that you use exclusively for business purposes. If the total is 2,500 square feet, and if your work area is 250 square feet, you're entitled to deduct 10 percent of qualifying home expenses because they're dedicated to your business. Divide the total area by your work area to arrive at your percentage.

Allowable home-related expenses include:  

  • Casualty losses (with limits)
  • Mortgage interest
  • Real estate taxes
  • Homeowner's insurance
  • Home depreciation 
  • Rent, if you don't own your home 
  • Repairs made to your work area or that benefit your work area 
  • Utilities 

If your total allowable expenses are $20,000 a year and you're entitled to a 10 percent deduction, you've just saved $2,000 by claiming a home office expense deduction -- most likely more than if you had opted for the simplified calculation. 

If you're self-employed, you would then report this deduction on Line 30 of Schedule C with your tax return. 

A Caveat 

Not all home businesses are treated exactly the same. Special rules apply to day care operations and if you use your home space to store inventory. Consult with an accountant or tax attorney if this is the case. 

Back to Taxes and Your Home Business

Disclaimer

This article presents general information; I am not a tax attorney or tax preparation specialist. Refer to IRS publications and refer questions to your tax consultant.