Working from home has become the standard for many of us and a common question clients often ask is “Are there any write-offs for my home office?” The good news is that there are, but as is often the case, there are conditions. Let’s take a look at what the home office deduction is, who qualifies, and the two methods used to claim it.
What is the Home Office Deduction?
In the simplest terms, the Home Office Deduction allows self-employed individuals who work from home to deduct certain costs related to using part of their home. The caveat is that the home office must be used exclusively and regularly for business purposes in order to qualify for the deduction. The bolded word, “exclusively,” is what usually trips people up. Exclusively, by definition, means “solely,” or “only.” Neither your couch nor your kitchen island is going to qualify simply because you check work emails there. The same goes for your “home office” that doubles as your guest bedroom when family and friends come into town.
Who Can Take the Home Office Deduction?
Because tax law likes to keep us on our toes, the taxpayers who are eligible to take the home office deduction has recently changed and is set to change again in the near future.
- Self-Employed Individuals: This includes freelancers, independent contractors, small business owners, and even partners in a partnership (as Unreimbursed Partner Expenses). As always, there are additional caveats here depending on what type of self-employed individual you are, but generally, you can claim the deduction if your home is your primary place of business.
- No longer, but possibly in the near future: Employees Working from Home
Prior to the Tax Cuts and Jobs Act (TCJA), employees could qualify for a home office deduction if their employer didn’t reimburse them for the expenses. This deduction was suspended with TCJA, however, the suspension is set to sunset at the end of tax year 2025. This would make the deduction available again to W-2 employees starting in 2026. Still, I wouldn’t get your hopes up. There’s always the possibility that the suspension may get extended. We all have to wait until Congress issues some guidance on this.
How to Calculate the Deduction: Actual Expenses vs. The Standard Rate
Gotta love options. When it comes to calculating the amount you can deduct, the IRS offers two different methods: the Actual Expense Method and the Simplified Method.
1. The Actual Expense Method: “Oh, This Is Going to Be a Lot of Work…”
This method involves figuring out what percentage of your home is used for business, then applying that percentage to various household expenses. The list of deductible expenses is long, but here are a few examples:
- Mortgage Interest or Rent: If your home office is 10% of your house, you can deduct 10% of your mortgage interest or rent. Mortgage payments themselves are not a deductible expense, however. See “Depreciation” later on for more on this.
- Utilities (such as electricity, water, and gas): Utilities that relate to your entire home to include the home office will be deductible based on the square footage of your home office. If, however, there’s a utility expense that relates solely to the home office (let’s say you have a separate business landline in your home office that’s 100% used for business), you’ll be able to deduct that expense 100% without regard to your home office size.
- Homeowners Insurance: Yep, you can deduct a portion of this, too.
- Repairs and Maintenance: The cost of fixing that window that won’t close or even the cost of hiring cleaners to clean your home office can be deductible.
- Depreciation: In lieu of deducting mortgage payments if you are a homeowner, you will instead get to take a depreciation deduction for the portion of your home that you use as your office. Depreciation can be a significant deduction depending on home office size and basis of property.
The key to using the Actual Expense Method is keeping good records of all your expenses…something many taxpayers struggle with. Another factor to consider is that claiming this method will cost you more in tax prep fees. Just as it takes you time to aggregate all of your expenses, it is going to take your CPA time to ask you for the expenses, get clarifications, and create an asset report to claim your depreciation. There are even cases where the additional cost of tax prep wipes out any tax savings of using the actual method!
2. The Simplified Method: “Keep it Simple, Sister.”
The Simplified Method is a streamlined approach that lets you claim a flat rate of $5 per square foot for your home office, with a maximum of 300 square feet.
In other words, if you have a 300-square-foot home office, you could potentially deduct $1,500 (300 sq ft x $5) as your home office deduction. A benefit of using the simplified method is that there’s no need to track any expenses. This is a set-it-and-forget-it deduction that is preferred by taxpayers who find record-keeping more tedious than watching paint dry.
Things to Watch Out For
There are a couple of things to keep in mind when it comes to the home office deduction:
- Depreciation Recapture: If you use the Actual Expense method to figure your home office deduction, you might have to recapture prior depreciation taken when you sell your home. Essentially, if you’ve deducted part of your home’s value for business use, and then sell your home, you may face a higher tax bill. A higher than expected tax bill is never any fun, so this is something to consider when choosing a method.
- Audit Risk: Though a very small percentage of returns are audited overall, returns with home office deductions are of the returns that are audited more often. If your home office is really a coat closet or you’re trying to deduct a “business expense” that doesn’t quite add up, you might find yourself facing an audit. Keep your records organized and always be prepared to justify your deduction if needed.
Whether you use the Actual Expense Method and track your costs down to the penny or take the more straightforward Simplified Method using $5 per square foot, the home office deduction can help you shave money off your tax bill. Set up that office space and get to work to start reaping the benefits!
