The Home Office Tax Deduction in 2023
I’ve worked remotely my entire career. It’s amazing.
I get to pet my dog all day, work in sweatpants, do errands in the middle of the day, and avoid heinous commutes.
Also, I get to cash in on the home office tax deduction every year.
Since I have a home office, I can use the home office deduction on my taxes. This saves me several hundreds of dollars a year.
If you have a home office and self-employed, I strongly recommend that you take advantage of this.
I also recommend using TurboTax as it makes doing your deductions much easier but lets begin with more about home office tax deductions themselves.
What is the Home Office Tax Deduction?
The home office deduction provides a tax break for taxpayers who use a part of their home for business. It isn’t limited to homeowners – it’s also available to renters and people who live in apartments, condos, and any other type of home.
There are three basic requirements for claiming the home office deduction:
- You must be self-employed. Before the Tax Cuts and Jobs Act of 2017 (TCJA), the home office deduction was available to self-employed workers and people who had a home office for the convenience of their employer. But the TCJA eliminated most miscellaneous itemized deductions, including unreimbursed job expenses such as (you guessed it) the home office deduction. For now, only self-employed people can claim the home office deduction.
- You must use your home office regularly and exclusively. You must use your home office exclusively for conducting business. For example, if you work from your dining room table and also use that room for family meals, you can’t claim a home office deduction for your dining room. The good news is, your home office doesn’t have to occupy an entire room. It can be a corner of your bedroom or living room. As long as you use that space regularly and exclusively for business, it qualifies for the deduction.
- Your home office must be your principal place of business. If you typically conduct business at a location away from home but occasionally work from a home office, you can’t claim the home office deduction. Your home must be your principal place of business. That doesn’t mean you can’t occasionally work elsewhere.
What Expenses Can I Deduct?
Here are some examples of the types of costs that you can use to claim the home office tax deduction:
- Interest on your home mortgage
- Mortgage insurance premiums
- Utility bills
- Homeowner’s insurance
- Homeowners association fees
- Repairs and maintenance
- Property taxes
- Internet service
- Pest control
- Cleaning services
There are also a few costs of maintaining your home that don’t apply:
- Lawn maintenance. Cost for landscaping and lawn care generally aren’t deductible unless you regularly meet with clients in your home office.
- Pool cleaning and maintenance. The IRS considers the cost of maintaining a swimming pool to be unrelated to either the office or the home, so you cannot deduct these costs.
- Telephone expenses. The cost of the first landline phone in your home is considered to be a personal expense, so you can’t include it in your home office deduction calculation. However, if the phone company charges you for long-distance calls, you can deduct those charges (assuming they were made for your business) as a business expense. If you have a second phone line that you use just for business, you can deduct the cost of that line as a direct expense.
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How to Claim the Home Office Tax
You have two options for calculating the home office deduction:
1. The Regular Method
The regular method involves adding up the total expenses of maintaining your home for the year and multiplying them by the percentage of your home used for business.
For example, say your home is 1,200 square feet in total, and you use 100 square feet (8%) for your home office. You would calculate your home office deduction by multiplying the indirect costs of maintaining your home by 8%.
Using the regular method, you can also deduct 100% of the direct costs of your home office. Direct costs are expenses that directly relate to the home office.
For example, if you repaint the exterior of your home, that’s an indirect cost, and you can claim a portion of it for the home office deduction. On the other hand, if you installed bookshelves in your home office, that’s a direct cost.
If you use the regular method, you’ll calculate your home office deduction on IRS Form 8829. Your total deduction calculated on this form carries to Line 30 of Schedule C (for sole proprietors and single-member LLCs) or Part II of Schedule E (for partnerships and multi-member LLCs).
If your business is structured as a corporation, unfortunately you can’t take advantage of the home office deduction, as the IRS considers shareholders to be employees of the company.
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2. The Simplified Method
If tracking the various expenses for maintaining your home seems like too great a chore, the IRS offers a simplified method for calculating the home office deduction.
This method allows a deduction of $5 per square foot used for business, up to a maximum of 300 square feet. So, with a 100 square foot office, your deduction would be $500 (100 square feet x $50).
You can choose to use either the regular method or the simplified method for calculating your home office deduction each year. You can even switch off between the two methods from year to year, depending on which one gives you a higher deduction.
If you use the simplified method to calculate your home office deduction, you don’t need to complete Form 8829. Just enter the total square footage of your home, the square footage of your office, and your calculated deduction on Line 30 of Schedule C.
Special Rules for Claiming the Home Office Tax Deduction
Like most tax breaks, the home office deduction comes with a variety of special rules, regulations, and exceptions. Here are a few you need to know.
If you use a separate, free-standing structure for business, such as a studio, barn, workshop, or garage, you don’t need to pass the “principal place of business” rule.
IRS Publication 587 provides an example of a floral shop owner who grows the plants for his shop in a greenhouse behind his home.
Because the greenhouse is a separate, free-standing structure used exclusively and regularly for business, the owner qualifies for the home office deduction, even though the greenhouse isn’t the principal place of business.
If you provide daycare for children, the elderly, or disabled individuals in your home, you don’t have to meet the “exclusive use” test to claim the home office deduction.
For example, say you provide in-home daycare in your living room from 7 a.m. to 6 p.m. each day, then use that room for family time or personal activities on evenings and weekends.
You would still qualify for the home office deduction. However, the IRS specifies that your business must meet any applicable state and local licensing requirements to qualify.
The “exclusive use” test also doesn’t apply if you use part of your home to store product samples or inventory.
For example, say you run an online clothing boutique and regularly use half of your basement to store inventory. If you occasionally use that part of the basement to store personal items, you won’t lose out on your home office tax deduction.
However, the IRS specifies that your home must be the only fixed location of your business to take advantage of this exception.
The deduction can’t create a loss
You must have income from your business to claim the home office deduction, and the deduction can’t create a loss that offsets other income.
For example, say you had a tough year in business, and your net income (after deducting regular business expenses) was just $1,000, while your calculated home office deduction for the year was $1,200. You won’t be able to claim the full home office deduction because it would create a loss of $200.
However, if you use the regular method to calculate your home office tax deduction, some of the unused deductions can be carried forward to the next year.
Depreciating your home office
If you own your home and use the regular method to calculate your home office deduction, you’re required to deduct depreciation. Depreciation is a mechanism for deducting the cost of wear and tear on the part of your home used for business.
Calculating depreciation is a little complicated. You need to know:
- The month and year you started using the home for business
- What you paid for the house (but not the land), or the fair market value at the time you started using it for business
- The cost of any improvements made before and after you started using it for business
- The percentage of your home used for business
If this is the first year you used your home for business, you can use Table 2 in IRS Publication 587 to calculate your depreciation deduction. But most reputable tax software will handle the calculation for you.
Ignore the Rumors, Take the Deduction
I used to hear rumors that the home office tax deduction was a red flag that increased your chances of an IRS audit. While that may have been true in the past when home offices were rare, technology and the rising number of people who make a living online has made them much more common.
Don’t worry about increasing your chances of being audited.
Just be sure you meet the requirements and keep excellent records to support your deduction. There’s no need to fear an IRS audit if you’re following the rules.