Guide to home office tax deductions

Thanks to the pandemic, many people found themselves working from home for much of 2020. In fact, some never returned even once it was safe to do so. According to PwC, more than half of employees would like to work from home most of the week, and both employers and employees rate the shift to remote work as successful.

Working-from-home is likely here to stay, at least to some extent.

Whether WFH means dusting off a never-used desk in the den or creating a productive corner of your bedroom for work, it’s common for individuals to begin using home space and personal expenses to make their working conditions more favorable. In some cases, these home office expenses can be tax deductible.

Today we’re diving into home office deductions to help you determine if you’re eligible for these tax breaks and how you can access them. Let’s get started.

Who is eligible for home office deductions?

Home office deductions are available only for self-employed individuals, and not applicable to anyone who works for an employer. However, if you have a side gig or worked for some time as a freelance or self-employed individual you can qualify for the home office deduction even if you work for an employer.

The home office tax deduction is designed to help individuals who work from home. In the past, any individual who worked from home was able to take advantage of the deduction, but in 2018 the Tax Cuts and Jobs Act (TCJA) was passed to simplify tax laws and regulations. One of the simplifications was to limit the eligibility for home office deductions to only self-employed individuals.

This tax reform placed the onus on employers to facilitate employee’s home workspaces, meaning that your employer should be helping you cover necessary expenses for setting up a home office. For those without employers—a tax deduction cuts the expense of setting up your workspace.

Anyone who has self-employed income and does that work from home can utilize a home office deduction, so even if you’re a standard W-2 employee you can claim home office deductions if you have a side gig or temporary freelance work that was done from your home. You just need a Schedule-C and the related income from self-employed work.

Does my home office qualify for the tax deduction?

To qualify for tax deductions, your home office must be regularly and exclusively used for business purposes. It must also be the principal place of business. (Source: IRS)

Your home office needs to meet some specifications before it’s eligible for the tax deduction, in addition to your status as a self-employed individual. There are certain standards for tax deductions, and careful calculations used to determine how much qualifies for the tax break.

Regular & exclusive

Your space must be used “regularly and exclusively” for your work. It doesn’t have to be a dedicated room, but it can’t be a shared space and equipment used for multiple purposes. For example, you can have a nook in your bedroom that you use for work but you can’t claim a dining room table because you work from the kitchen.

Principal place of business

Additionally, your home office must be the principal place of business for your self-employed company. This doesn’t mean that ALL of your work takes place in your home office, it just means that it’s where you do the general business tasks for your business. For example,  if you’re an electrician you might travel to homes and offices for your work, but your home office is where you manage your books and business operations.

What home office expenses qualify for tax deduction?

You can find a complete list of qualifying deductions outlined in IRS Publication 587.

Generally home office expenses can qualify for tax deduction so long as they’re specific to the area used for your business operations, and are reasonable.

• Materials for preparation: paint, flooring, finish work
• Repairs to the specific area
• Proportional percentages of house expenses
• Mortgage interest or rent
• Utilities like electricity, water, gas, internet
• Phone plans
• Homeowner’s insurance
• Cleaning
• Property taxes
• Home depreciation
• Security system

Be careful not to include expenses that apply to the living area of the home, or permanent improvements (such as remodeling your kitchen or painting the exterior).

Direct vs. indirect expenses

Deductible home office expenses fall into two categories: direct and indirect. It’s important to classify your expenses accurately, because the calculations for deductions depend on the category of expense.

Direct expenses

• Relate to your workspace exclusively
• Fully deductible
• Purchases & repairs for your workspace, like paint

Indirect expenses

• Relate to the greater house where the home office is located
• Partially deductible based on the proportion of your home office to the entire home
• Expenses that support your home as a whole, like utilities, mortgage interest, and roof repairs

For both direct and indirect expenses you’ll need to keep the totals straight to maximize your deductions. Work with your tax professional to help you keep deductible expenses straight.

How to calculate your home office deduction

Calculating home office deductions is much like the process of taking a standard deduction for personal taxes—you have the option to take the simplified approach that is easier but might limit your deduction, or you can itemize your home office expenses for a more complicated but complete deduction. It will depend on your personal situation and which will be of most value to you as a self-employed individual.

Actual expense method

The actual expense method allows you to deduct each and every actual expense used for your home office, including the proportional amount of house expenses (mortgage interest, utilities, etc.). This method requires much more careful documentation and mathematics to ensure you are appropriately claiming and calculating expenses for your home office.

1. Start with direct expenses and total them up (e.g. paint for your home office)
2. Add up home expenses (also known as indirect expenses) for the year, including mortgage interest, utilities, property taxes, etc.
3. Calculate the portion of your home used for home office purposes. (300 square feet out of a 3,000 square foot home would be 10%.)
4. Determine the percentage of your indirect expenses that can be attributed to your home office (10% in our example).
5. Add direct expenses to your indirect expense percentage for the total amount you can deduct.

Need help keeping track of expenses and receipts? Try BILL Spend & Expense.

Simplified method

In 2013 the IRS simplified home office deductions by creating a standardized home office tax deduction that doesn’t require itemized expenses. In the simplified method you deduct $5 per square foot up to 300 feet, maxing out at $1,500. This deduction is usually less than your actual expenses, but it frees up time and resources by sidestepping the calculations and paperwork needed for the actual expense method.

How do you file a home office tax deduction?

Filing home office deductions for your taxes is relatively simple, especially if you use the simplified standard deduction.

Simplified method: Take the deduction on your Schedule C.

Standard method: Submit Form 8829 with your income tax return and report the deduction on your Schedule C.

Getting the most from your home office deductions

Self-employed individuals pay a high rate of taxes, so it’s essential that they maximize their deductions to balance. Take the time to calculate the space in your home that comprises your home office so you can begin to take the deductions you’re due. Consider if the standard deduction is worth the time saved or if the extra math is worth some extra deductions. Take advantage of your deductions to optimize business taxes and give yourself a leg up. You deserve it.

BILL Spend & Expense helps small businesses manage expenses with smart cards and software. We save you time AND money. Sign up for free today.