For Businesses-of-One, setting up a home office can be a great way to get tax deductions. But figuring out how to go about writing off a home office can be confusing. This guide will help you understand what expenses you can write off when you’re self-employed and how to claim a home office on your taxes.
What is the home office tax deduction?
The home office tax deduction is a way for self-employed people to deduct certain expenses associated with their home office, such as rent or mortgage interest, utilities, repairs and maintenance costs, insurance premiums, and other related home expenses. You can only write off the portion of these expenses directly related to your work activity.
How do I qualify for the home office tax deduction?
In order to claim a home office deduction, you must use part of your home exclusively and regularly as your primary place of business. This means that if you don’t use the space solely for work—for example, if you have an extra bedroom that you use as an office but you also use your exercise bike in it—you won’t qualify for the deduction.
This is one of the deductions that the IRS looks at most strictly so its important that the home office space you’re deducting is truly the amount of your home exclusively used as a home office.
Regular use means that you consistently use your home office for your business. You can’t use a room in your house once a year and consider it a home office.
Your home office qualifies as your primary place of business if you:
- Meet clients or customers there regularly
- Use it for administrative or management activities—such as billing clients, keeping track of expenses, and other record-keeping tasks
To recap, to qualify for a home office tax write-off, your home office needs to meet all of the following requirements:
- Used exclusively for business
- Used regularly for business
- Is your primary place of business
How do I calculate my home office tax deduction?
There are two methods for calculating the home office deduction: the simplified method and the regular method. Under each method, different expenses may be eligible. Here’s how each method works.
Simplified Method
Under the simplified method, you can deduct $5 per square foot of your home that is used for business, up to a maximum of 300 square feet. For example, if your home office is 100 square feet, it looks like this:
100 sq feet x $5 = $500
Your deduction is $500.
Regular Method
Under the regular method, you deduct a portion of your home expenses related to your home office. The portion that you can deduct is based on the percentage of your home devoted to business use.
For example, if your home office is 10% of the total square footage of your house, you can deduct 10% of all relevant expenses (we’ll chat about those next). Here’s what this method would look like if you have $3,000 per month in home expenses.
$3,000 x 0.10 = $300/month
$300 x 12 = $3,600/year
Your home office deduction is $3,600.
What expenses can I deduct for the home office?
The following expenses are eligible for a home office tax deduction:
- Rent
- Mortgage interest
- Utilities, such as electricity, gas, water and garbage
- Homeowner association fees
- Renter’s or homeowner’s insurance premiums
- Other related home expenses
Keep in mind that certain expenses, such as landscaping or general home improvements, are not eligible for the home office deduction, even if they may increase the value of your home.
It’s important to keep track of all your business-related expenses so you can accurately deduct them on your taxes. Be sure to save all receipts for any purchases made that are related to your home office. You may need these when it comes time to file your taxes.
How does the home office deduction work on my taxes?
When it comes to filing your taxes, the home office deduction works just like any other business expense. You’ll need to fill out Schedule C (Form 1040) and include your home office expenses under Part II: Business Use of Home.
If you make a profit on your business activities, you can deduct any home office-related expenses against that income. If you don’t end up making a profit, then the total amount of allowable deductions can’t exceed your total income.
For example, if you earn $60,000 in profit and have $3,600 in home office expenses, you can deduct the full $3,600. However, if you only earned $3,000 in profit, you could only deduct up to $3,000 in home office expenses.
Another way of thinking of it is that the home office deduction can’t be used to create a business loss on your taxes.
I’m an S Corp- how does the home office deduction work for me?
As an S Corp owner, you’ll create an accountable plan with your S Corp, which will allow you to be reimbursed for any home office expenses by your S Corp. The reimbursable portion will be based on the percentage of the home used for business purposes, just like the Regular Method mentioned above.
Each month you’ll submit an expense report to your S Corp for the home office expenses and your S Corp will reimburse you. The S Corp will treat these reimbursements as deductible expenses.
This is essentially like getting a deduction for home office expenses, but it’s being done through your S Corp instead of on your individual tax return.
Home Office Deduction FAQ
Does the home office deduction reduce gross income?
Yes, the home office deduction reduces your gross income by reducing the amount of taxable business income you report on your taxes. Keep in mind that you can only deduct up to the amount of business income you earned.
Do I need receipts for home office expenses?
Yes, it’s important to save all relevant receipts when claiming your home office deduction. You may need them during tax season or if the IRS audits you.
Do I need to file for the home office tax deduction?
Yes, you must file a Schedule C (Form 1040) with your taxes to claim the home office tax deduction. You’ll include all relevant expenses under Part II: Business Use of Home.
Do I have to take the home office deduction every year?
No, you don’t have to take the home office deduction every year if you don’t want to. That said, eligible expenses can reduce your taxable income and lower your taxes owed so it might be beneficial for some people.
Do I qualify for a home office tax write-off if my office is not used exclusively or regularly?
No, in order to qualify for a home office tax write-off, your space needs to be used exclusively and regularly for business purposes. It should also be your primary place of business.
Yes, you can deduct Internet and phone bills that are directly related to your work. This deduction is considered separate from the home office deduction and will be based on the portion you use for business versus personal use. You’ll report your internet and phone expenses on the Schedule C of your personal tax return.
Can I deduct expenses for a separate structure on my property, such as a detached garage or studio?
Yes, you can deduct expenses for a separate structure that is used exclusively and regularly for business purposes. The same rules apply to this deduction as the home office deduction; you’ll report your expenses on Schedule C of your personal tax return (Form 1040).
Can I claim the home office deduction if I only work from home part-time?
Yes, you can still qualify for the home office deduction if you only work from home part-time. The key is that your space must be used exclusively and regularly for business purposes and it needs to be your primary place of business. If this is the case, then you should be eligible for the deduction.
Can I claim the home office deduction if I work from home for a company as an employee?
No, you can’t claim the home office deduction if you’re an employee working from home for a company. The deduction is intended for people who are self-employed and use their home as a dedicated business space.
By understanding the requirements and calculating your home office deduction properly, you can save a lot of money on taxes. Just be sure to keep detailed records of all your business expenses throughout the year and consult with an accountant or tax professional if needed.
This can help ensure you receive all of the deductions you’re eligible for. Good luck!
