Today's job market offers a range of employment options, many of which make it possible to earn income from home. However, working from home doesn't automatically qualify you for the home office tax deduction.
Below, we break down the deduction, who qualifies, and how to check your eligibility.
What is the home office tax deduction?
The home office deduction offers tax breaks to eligible workers with dedicated home office space used solely for business. This deduction helps self-employed workers offset entrepreneurial costs; however, they must prove their space is used exclusively for work — any personal use disqualifies eligibility.
There are two ways to claim this deduction, depending on your expenses, recordkeeping, and the tax year's rules.
Simplified method
Introduced by the IRS in the 2013 tax year, this straightforward method offers a flat $5 deduction per square foot of your home office space used exclusively for business. Under the simplified method, you can claim up to 300 square feet of space, for a maximum deduction of $1,500.
This method still allows you to fully claim home-related itemized deductions on Schedule A. However, you cannot claim home depreciation for the years you used this method, nor can you retroactively claim it.
Regular method
The regular method typically offers bigger savings, as it is based on actual expenses. However, it requires calculating your home's business use percentage by dividing the square footage of your home office by the total footage of your home.
With this method, you can deduct indirect business expenses at the business use percentage. Direct business expenses are fully deductible. Additionally, unlike the simplified method, the regular method allows you to claim home depreciation.
Can I claim a home office deduction as a work-from-home employee?
If you're a work-from-home employee, you cannot claim a home office deduction due to the Tax Cuts and Jobs Act of 2017. The tax break is only available to self-employed individuals, including freelancers, gig workers, and independent contractors. W-2 employees are not eligible, even if they work remotely for an employer.
There are exceptions, however. If you are both self-employed and employed separately as a W-2 employee, you may qualify — but only for the months when you earned self-employed income. To be eligible, this income must be reported on Schedule C.
[Read more: Ready. Set. Scale. Smart Tax Tips for a Stress-Free Filing]
Even if you were only self-employed for a few months out of the year, you can still claim a partial home office tax deduction.
How do you calculate the deduction?
A home office deduction can either be calculated using the regular or simplified option. The regular method requires calculations using IRS Form 8829, Expenses for Business Use of Your Home, to deduct your home office expenses.
With the simplified option, your home office square footage is multiplied by a predetermined rate set by the IRS. While the simplified option may be easier, you could be losing out on some additional deductions by not using the regular method. However, the regular method requires more in-depth work, including calculating all of your actual expenses and keeping a record of all receipts.
For both methods, the home office deduction can only be used if the portion of the residence is used exclusively and consistently for business purposes, the size of which determines your business use percentage.
To calculate the business use percentage of your home, measure the square footage you dedicate to your home office and compare that to the total square footage of your home. For example, if you rent an 800-square-foot studio apartment and 100 square feet of your home is dedicated to your home office, your business use percentage is 12.5% (100/800 = 12.5%).
There are exceptions to this rule, such as if you run a daycare in your home. Because that space is available for personal use outside of your hours of operation, you must reduce your business use percentage by totaling the number of business hours per year. So, if you use 30% of your home for your daycare business and you work nine hours per day, five days per week for 51 weeks of the year, the calculation would be as follows:
- Nine hours per day x five days per week x 51 weeks = 2,295 hours per year.
- 2,295 x 8,760 total hours annually = 0.26 (26%) of available hours.
- 26% of available hours x 30% of home used for business = 7.8% business write-off percentage.
What qualifies as an eligible home office?
Workers can qualify for the home office tax deduction regardless of what their office space looks like, as long as it meets one of these two requirements:
- The space is regularly and exclusively used for business. Regular and exclusive use means you’ve dedicated an area in your home for running your business.
- The space functions as your principal place of business. To claim your home office as a primary place of business, you must show that you use your home to conduct the majority of your business.
What other expenses are deductible?
Various purchases for a home office can be deducted if they are listed as business expenses on Schedule C. Some examples of home office expenses that may be deductible include:
- Printers, scanners, and additional computer monitors.
- Office furniture, such as desks, chairs, and storage solutions.
- Internet modems and other connectivity equipment.
- Video call accessories, including ring lights, headsets/microphones, and laptop stands.
- General stationery needs, such as printer paper, notebooks, writing implements, and shipping materials.
Keep track of all of your business expenses and receipts to ensure you can prove your purchases in case you're audited.
[Read more: A Complete Guide To Filing Your Business Taxes]
What is the process for taking the deduction?
Filers have different options for taking their deduction depending on the method used to calculate it. Those using the simplified method take the deduction directly on Schedule C when reporting the income and expenses for their business. However, those who calculate deductions using the regular method submit Form 8829 with their tax return. Afterward, they report the total deduction from the business income on Schedule C.
If your home office expenses are more than your business income for the year, your deduction will be limited, as your Schedule C income cannot go below zero using business use of home office expenses.
Can you claim the deduction if you've been self-employed for a few months?
Even if you were self-employed for a few months out of the year, you can still claim a partial home office tax deduction. Be sure to only use expenses for the months you were self-employed, or otherwise eligible, to calculate the deduction.
If an eligible taxpayer decides to use the simplified deduction method, they can use the number of months they worked from home to prorate the amount they can deduct. They can deduct a portion of actual expenses for the months they were eligible for the deduction.
[Read more: 10 Smart Small Business Tax Strategies That Will Save You Money]
Will a home office tax deduction trigger an audit?
Some self-employed workers may be concerned that filing for a home office tax deduction could trigger an audit. However, a home office deduction is a viable, legitimate deduction that the IRS has granted since 1959.
Many of these concerns stem from the Tax Reform Act of 1976, which introduced Section 280A to allow taxpayers to deduct their utilities, home depreciation, and home insurance on a prorated basis. Since then, there have been several changes to IRS requirements and Supreme Court decisions regarding how to apply Section 280A.
One of the biggest driving forces behind the concern around home office tax deductions is the Discriminant Inventory Function System (DIF), the IRS' fraud prevention system. The DIF searches for irregularities in tax returns and compares them to other taxpayers' returns with similar tax profiles. The other is the IRS Fraud Enforcement Office, which investigates fraud-related incidents.
Filing for a home office tax deduction alone won't trigger an audit. However, depending on your situation, it could be a red flag, which is why you shouldn't claim too much of your home as your workspace. To minimize the chances of an audit, verify that you qualify for the deduction, accurately track your expenses, and maintain orderly receipts and records.
This article was originally written by Julianna Lopez.
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