Running your business from home is convenient. You can take a tax deduction for your use of this space if you use it regularly and only for your business. “Home” can be a house, apartment, condo, mobile home, or even a boat, if you can live on it.
This article takes you through the process of determining whether your home business space is eligible for the deduction and how to calculate it, using either a simplified method provided by the IRS or actual expenses.
- The federal tax code allows home businesses to take a tax deduction for a specific space in the home where they do business.
- The owner must use the space regularly and exclusively for business purposes and it must usually be their principal place of business.
- To calculate the tax deduction, the business may use a simplified option or an actual expenses option.
- There are qualifications and limits for this deduction, so getting help from a licensed tax professional is an important first step to adding this deduction to your business tax return.
What Is the Home Office Deduction?
The home office deduction is a way for self-employed business owners, including sole proprietors, limited liability company (LLC) owners, or partners in partnerships, to deduct from their business tax bill certain expenses for the use of a part of their home for business purposes.
To take this deduction, you must be able to show that you are self-employed and that you meet one of these criteria for use of the space, per the IRS’ guidelines:
- Exclusively and regularly used as your principal place of business for your trade or business
- Exclusively and regularly used to meet and deal with clients, patients, or customers in the course of your business
- A separate structure not attached to your house used exclusively and regularly for your trade or business
- Used on a regular basis for storing inventory or product samples, if you have a retail or wholesale business
- For rental use
- As a daycare facility
Employees who work at home may no longer use the home business tax deduction. This change is effective from 2018 through 2025.
Tax Terms Related to Home Businesses
“Exclusive use” means you must use the specific space only for business purposes. The space can be part of a room and it doesn’t have to be physically marked off to qualify. You don’t have to meet the exclusive-use rule if you use that part of your home for storing inventory or product samples, or for a daycare facility.
“Regular use” means you use that space on a regular basis, not just occasionally or incidentally. For example, if you use space as a home office where you go every month to pay bills, that’s regular use. But using it only once a year to prepare your tax return probably wouldn’t apply.
“Trade use” or “business use” means use for activities that produce income (profit) from selling goods or services. Nonprofits wouldn’t qualify for this deduction, nor would hobby businesses that don’t make a profit.
To be your principal place of business, your home office must be:
- Used regularly and exclusively for administrative or management activities, and,
- You use no other location these activities
If you do business in several locations consider:
- The relative importance of the activities in each place, and
- The amount of time spent at each place.
Partners in partnership businesses may be able to deduct business use of home expenses if the partnership doesn’t reimburse them for these expenses. The total from each partner’s calculations goes on these three tax forms schedules E, SE, and K-1.
How To Calculate the Home Office Deduction
Home business owners can calculate their home office deduction in two ways: the simplified option or actual expenses.
The major advantage of this deduction method is that you don’t need to itemize expenses and do complicated calculations.
To do this calculation, multiply the square footage of your home office (up to 300 square feet) by $5. The maximum simplified deduction is $1,500 (300 square feet x $5).
For example, if the home office where you conduct your business is 155 square feet, multiply that by $5. Your deduction would be $775.
This option works best for business owners who have only a small space, like a small storage area on their property or an office area in a bedroom, and use it regularly and exclusively for business activities.
You may have to do a few more calculations to get the total deduction amount. See the worksheet on page 25 of IRS Publication 587 for the rest of the calculation.
The actual-expense deduction is used by businesses that have a larger space than 300 square feet or who want to get more deductions than the simplified method gives.
The following calculations are a simple overview of what you’ll need to do this calculation on the worksheet on page 21 of IRS Publication 587.
First, calculate the percentage of your home-office area used for businesses by dividing the total home area by your office area. Let’s say your total home area is 1,800 square feet and your home-office business area is 396 square feet. The home business space to use for calculations is 22% of the home space.
To use the actual-expenses method, you’ll need the gross income from your business for the year (before any deductions).
Then you’ll need to divide your home and home business expenses into three types:
- Direct expenses are those for just your home office business space, like painting or repairing the space. These are fully deductible.
- Indirect expenses are those for keeping up and running your entire home, like utilities, homeowner’s insurance, and roof repairs. These expenses are deductible based on the percentage of your home’s square footage that your home office takes up (22% in the example above).
- Unrelated expenses are those for areas of the house that don’t affect the business space. These expenses, like lawn care and painting a room not used for business, aren’t eligible for the home business deduction.
Your next steps are to add up your direct expenses and multiply them by 100%, then add up your indirect expenses and multiply them by the percentage of your home that your home office uses (22%, in our example).
After you are done with these preliminary calculations, there are more calculations you must go through, including calculations for depreciation, operating expenses, and casualty losses.
Additional Calculations and Restrictions
If your home business has a loss from business operations, using the simple calculation or actual expenses, your home business deduction amount can’t be more than your gross income from the business use of your home minus business expenses.
If you use the actual-expenses method and you own your home, you can take a depreciation deduction for the year for “wear and tear” on this part of your home. You can’t depreciate the cost or value of the land your home is on, but you can depreciate the portion of property taxes and mortgage interest for this business-only area.
You can’t deduct depreciation for the part of your home used for qualified home business use if you use the simplified deduction method. However, you can still claim depreciation on other assets used for your business (like furniture and equipment) if you use the actual expenses method.
If your business is in a federally declared disaster area during the year, you may be able to deduct casualty losses for your home business.
Tips for Taking the Home Office Deduction
The IRS can come to your home to audit your home business to verify that you are complying with all of the requirements for taking your home business tax deduction. To audit-proof your home business:
- Don’t mix personal and business items in your space
- Buy and use separate computers, printers, and other electronic devices in your home office, so there’s no question that they are being used exclusively for your business.
Taking the home business tax deduction requires that you keep excellent records, too, including information on:
- All home tax records, like mortgage interest, real estate taxes, any repairs, and improvements
- The part of your home you use exclusively and regularly for business
- Depreciation and expenses on the business part of your home
Even after you file your taxes, save all tax-related records for as long as the IRS might want to look at them. This is usually the three years from that year’s tax return due date or the date filed, or two years after the tax was paid.
Get help from a Certified Public Accountant or other licensed tax professional to make sure you calculate your home-office deduction correctly.
Frequently Asked Questions (FAQs)
Which form should I use to calculate the home office deduction?
Where does the home business deduction amount go on my Form 1040?
When you fill out your Schedule C, your home office deduction will be calculated into your net business income. Once you have that number, you’ll enter it on Line 31 and enter it on both:
- Line 3 of Schedule 1
- Line 2 of Schedule SE
You add the totals from these forms to your 1040/1040-SR to calculate your total business tax, which takes into account your home office deduction.
Can I switch back and forth between the two options from year to year?
You can use the simplified method in one year and the actual-expenses method in a later year. In this case, you must calculate the depreciation deduction for the later year. Keep in mind that the requirements for who qualifies for the home office deduction doesn’t change based on which deduction method you use.