Business owners are entitled to a deduction if they use their home office for business purposes. Any types of homes may be eligible for the deduction, including single-family houses, apartments, and condos.
The deduction does not require you to own the home and is available even if you rent your home or apartment. Free-standing structures such as garages or barns used for business purposes may also qualify.
Expenses related to the use of the home that may be eligible for deduction include mortgage interest, insurance, rent, property taxes, utilities, repairs, and depreciation expense. Please note that claiming depreciation expense with respect to a home office deduction could result in an increase in the tax you pay on the capital gain when you sell your home in the future.
The deduction for use of your home in connection with your business is one of the most commonly missed deductions for small business owners. Some taxpayers have the view that claiming the home office deduction increases the likelihood of an audit by the Internal Revenue Service (IRS).
However, based on our experience we have not found that the home office deduction is more likely to trigger an audit. In addition, if you maintain adequate documentation for computing the amount of the deduction, you should be able to easily substantiate the expenses deducted on your tax return.
In connection with preparing your return, small business owners should always make sure they consider whether any additional expenses may be deductible under the home office deduction. The amount of the deduction may be large, particularly in situations where you pay significant amounts of rent for an apartment or have large mortgage payments on your home.
The deduction is only available for business owners and self-employed individuals and may not be claimed by an employee. This article provides a brief overview of the key considerations relating to the home office deduction for business owners and self-employed individuals. Different rules would apply for claiming these expenses for entrepreneurs operating through a corporate structure.
The home office deduction is claimed by filing Form 8829: Expenses for Business Use of Your Home with your tax return.
Requirements for Claiming the Home Office Deduction
In order to claim a deduction for expenses related to your home office, your home office must be for regular and exclusive use and must be your principal place of business.
There are some exceptions to the general rules, including situations where the home is used for daycare or for storage of inventory or other items related to your business.
1. Regular and exclusive use
The area of your home designated as your home office must be regularly and exclusively used for conducting business. As a general rule, you cannot use the same area for other non-business purposes.
The most common example of an area that is regularly and exclusively used for your business would be if you have a separate room in your home or apartment with an office that you use for your business.
However, it is not necessary that the room be separate from the rest of the home. For example, you could have an area in a room with a desk that you use for your home office, and that area may still qualify provided that you regularly use that area exclusively for conducting business.
As a practical matter, it is good practice that the area be sectioned off or the division of the home office be clear such that you can easily demonstrate that area is only used for business purposes. Although not required, if possible, it would be good to set up a divider or other partition to clearly delineate the section used for business purposes from the other areas of the room.
2. Principal place of business
The home office must be your principal place of business. Notably, it is not required that your home office be your only place of business. If you maintain a separate office outside your home, you may still be eligible for the deduction provided you use the home office substantially and regularly to conduct your business.
Many taxpayers interpret this requirement to mean that the home office deduction is only available in situations where you do not have a separate office space for your company. However, as noted above, the deduction is eligible in situations where you have an office outside your home provided there is an office inside your home that is regularly and exclusively used for operating your business.
How to Compute the Home Office Deduction
There are 2 methods for computing the amount of your home office deduction. Taxpayers are free to choose either method.
1. Regular Method
Under the regular method, taxpayers determine the amount of the deduction by computing the actual expenses related to their home office. This may be done by computing the proportion of the square footage of the home office to the total square footage of the home to compute the percentage of the home used for business purposes. Thereafter, you multiply the percentage by the total expense to figure the amount of the deduction.
For example, assume your home office is 500 square feet and the total square footage of your home is 2,000 square feet (500 square feet divided by 2,000 square feet equals 25%). Your home office deduction would be 25% of the total eligible expenses. Therefore, if the total related expenses are $1,000, your home office deduction would be $250 ($1,000 multiplied by 25%).
Many taxpayers opt to use the simplified option discussed below as it is generally an easier method for computing the amount of expenses eligible for the deduction.
2. Simplified Optional Method
The simplified option is not based on actual expenses attributable to the home office. Under the simplified option, the amount of the deduction is the prescribed rate set by the IRS ($5 per square foot for the 2019 tax year) multiplied by the square footage of the home office area.
The maximum square footage of the home office is limited to 300 square feet for the 2019 tax year. For example, if your home office is 100 square feet, your home office deduction under the simplified method would be $500 ($5 per square foot multiplied by 100 square feet).
Taxpayers planning to claim a home office deduction on their return should maintain good receipts for the related expenses, particularly if electing to compute the deduction under the Regular Method. These include copies of utility bills or documentation from repairs and maintenance expenditures.