Home Office Deduction for Small Businesses
The home office deduction can save you taxes. It allows you to deduct a part of your rent or mortgage payments, utilities and other home expenses. It can also increase your business mileage deduction. Here’s what to know about the home office tax deductions for small businesses and self-employed.
Home Office Deduction Checklist
We’ll dive into the specifics about the home office tax deduction below. The key takeaways you should know are:
- You must use your home office exclusively for business
- It generally applies to self-employed workers but there are narrow cases where W2 workers can take it
- There are two methods to calculate the write-off for business use of home
- A qualifying home office can lead to larger overall driving deductions.
How Do You Calculate Home Office Deduction?
If your home office is 300 square feet or less, the IRS has an optional simplified method of calculating your home office deduction. You can deduct $5 for every square foot of your home office up to a maximum of $1,500. For example, if your home office is 200 square feet, you’ll get a $1,000 deduction.
Here’s a quick comparison of the two methods for taking a home office deduction:
|Criteria||Traditional Method||Simplified Method|
|Amount of Space||Percentage of your home used for business||Cannot exceed 300 square feet|
|Amount of Deduction||Actual costs associated with home office||$5 per square foot|
|How to Deduct||Home-related itemized deductions apportioned between Schedule A and business schedule (Sch. C or Sch. F)||Home-related itemized deductions claimed in full on Schedule A|
|Depreciation Deduction?||Applied to portion of home used for business purposes||No depreciation deduction|
|Can Deduction Exceed Gross Income?||No, deduction cannot exceed gross income from business use of home minus business expenses||Same|
|Can Excess of Gross Income Limitation Be Carried over?||Yes||No|
What Is Business Use of Home?
A home office is a place in your home that is used exclusively for business purposes. The IRS offers taxpayers a home office deduction to offset a portion of the costs of their home offices.
The home office deduction allows independent contractors, small business owners and others to lower their taxable income. In general, it’s meant for independent contractors but there are circumstances where W2 workers can take this write-off.
What Are the Home Office Requirements for Tax Purposes?
To qualify for this deduction, you must meet three threshold requirements:
- You must be in business (employees in someone else’s business can also qualify)
- You must use part of your home only for business (unless you store inventory at home or run a day care center)
- Use the home office for business on a regular basis.
You must meet all three threshold requirements. You must also meet any one of the following requirements:
- The home office is your principal place of business
- You regularly and exclusively use your home office for business activities. This could include managerial or administrative work
- You meet clients or customers at home
- A separate structure on your property only for business purposes is used
- Storing inventory or product samples at home
- You run a day care center at home.
Tax Write Off for Home Office Rule #1: You Must Be in Business
You must be in business to take this deduction. You can’t get the write-off for a hobby or other nonbusiness activity that you conduct out of your home. Yet, you don’t have to work full time in a business to qualify for this. If you meet the requirements, you can take the deduction for a side business.
If you’re an employee in someone else’s business, you can qualify for this. But, this is only if the home office is for the convenience of the employer.
Business Use of Home Rule #2: You Must Use Your Home Office Only for Business
You can only take this deduction if you use part of your home only for your business. If your home office is also used for personal reasons, you won’t qualify for the deduction. The more space you devote only to your business, the more your deduction will be worth.
Home Office Expense Deduction Rule #3: You Must Use It Regularly
It’s not enough to use a part of your home only for business—you must also use it regularly. You can’t place a desk in a corner of a room and claim this deduction if you almost never use the desk for your business.
How much is “regularly?” It’s not clear. The IRS only says you must use your home office for business on a continuing basis. One court has held that 12 hours of use a week is enough.
There is a good chance that you could also qualify with less use but no one knows for sure. You can keep track of how much you use your home office by making simple notations on a calendar.
One More Rule For Home Office Tax Deduction
You also must meet at least one of the following requirements to qualify for this deduction.
Your Home Is Your Principal Place of Business
The most common way to meet the extra rule is to show that you use your home as your principal place of business. How you do this depends on where you do most of your work and what type of work you do at home. If you do all or almost all your work in your home office, your home is your principal place of business. You’ll have no trouble qualifying for the is deduction.
If you work in more than one location, your home office can still be your principal place of business. This happens if you perform your most important business activities at home.
Your principal place of business is where you spend more than half of your time if you work at many locations. Thus, if you spend more than half of your time in an office provided by your employer, you won’t qualify.
You Do Administrative Work at Home
This deduction applies if you use the office for business administrative or management tasks. There must be no other fixed location where you can do these activities.
Administrative or management activities include, but are not limited to:
- Billing clients or patients
- Keeping books and recordsh
- Ordering supplies
- Setting up appointments, and
- Writing reports.
For example, a person drives for Uber or Lyft can qualify for this deduction if they do bookkeeping at home.
You Meet Clients or Customers at Home
You may deduct expenses for any part of your home you use only to meet with clients, customers or patients. This applies even if your home office is not your principal place of business.
You must physically meet with others in this home location; phoning them from there is not enough. The meetings must also be a regular part of your business. Occasional meetings don’t qualify. The IRS has indicated that meeting clients one or two days a week is enough to meet its requirements.
You Use a Separate Structure for Business
You can also deduct expenses for a separate free-standing structure. This could include a studio, garage or barn. You can only deduct it if you use it only and regularly for your employee work. The structure does not have to be your principal place of business. Nor does it need to be a place where you meet patients, clients, or customers.
You Store Inventory or Product Samples at Home
You can also take the home office tax deduction if you sell products and you store inventory or product samples at home. To qualify, you can’t have an office or other business location outside your home. And you must store your inventory in a particular place in your house, like a garage or closet.
Employees Only: Your Home Office Is for the Convenience of Your Employer
You may only take the home office deduction if the home office is for the convenience of your employer. Your home office is at the employer’s convenience only if it is:
- A condition of employment
- Necessary for the employer’s business to properly function, or
- Needed to allow the employee to properly perform his or her duties.
This test is not met if using a home office is for your convenience or because you can get more work done at home. You won’t pass the test if you have an outside office provided by your employer but like to take work home with you. Yet, you would pass the test if your employer doesn’t provide you with an office.
Even if you don’t qualify for the deduction, you may still get your employer to reimburse you. The reimbursement would not be taxable income so long as you account for your expenses.
Home Office Deduction Examples
A typical example of the home office deduction is someone who works from home and has a specific office for those purposes. But, you can still take this deduction if you’re self-employed and work outside your house.
For example, an Uber driver can use a portion of their home to manage their business finances and still qualify for this write-off. Likewise, a real estate agent can use a home office for work reasons and even if they have a brick-and-mortar office, can get this deduction.
How Much Is The Standard Home Office Tax Deduction?
The amount saved will depend on your costs. But, the home office tax deduction often provides significant tax savings because you may be able to include a portion of your mortgage or rent. Also, a home office deduction may unlock other deductions like an increased mileage deduction.
Regular Method: Tax Write Off for Home Office
The traditional method includes the actual expenses you incur for your home. Such expenses fall into two broad categories: direct and indirect. Direct expenses are what you incur just for your home office. This can include costs like painting your home office or paying someone to clean it. The entire amount of a direct home office expense is deductible.
An indirect expense is a payment for something that benefits your entire home. Most of your home office expenses will be indirect expenses, including:
- Rent, if you rent your home or apartment
- Mortgage interest and property taxes , if you own your home
- Depreciation, if you own your home
- Insurance, and
- Home maintenance expenses for your entire home.
You can only deduct part of an indirect expense: the percentage which relates to your home office. For example, let’s say you’re a renter and use 20% of your home for your home office. You’ll be able to deduct 20 percent of your rent, utilities and other indirect expenses.
Simplified Home Office Deduction
The IRS has created an optional simplified method of calculating your home office deduction. You deduct $5 for every square foot of your home office. Thus, all you need to do is measure the square footage of your home office.
For example, if your home office is 200 square feet, you’ll get a $1,000 deduction. That’s all there is to it. You can only use this method if your home office is 300 square feet or less.
Get The Biggest Tax Write Off For Your Home Office
In order to get the largest home office deduction, you’ll likely have to use both methods to find which deduction is larger. Remember, your deduction can’t exceed the gross income from the business use of your home.
In general, deducting the actual expenses will get you a larger write off. This is especially so if you’re living in an area with high mortgages or rent. Don’t forget to keep track of all your house expenses to back up this deduction.
How The Home Office Tax Deduction Can Increase Your Mileage Deduction
If you drive for your business, using the home office deduction can increase your mileage deduction. This is because it can cut out the IRS’s commuting rule. The IRS says that personal commuting is not deductible. For example, you can’t deduct the cost of driving from home to your regular outside office.
For professionals like Uber drivers, this can sting. The IRS commuting rule prevents you from writing off the cost of driving from home to pick up your first ride. This same rule applies to the drive home from your last ride.
That changes if you have a qualifying home office. Your home office qualifies as your principal place of business if:
- It’s the place where you earn most of your income
- It’s where you perform most of your administrative or business management tasks.
You can increase your deductions for business trips with a qualifying home office. For example, you can deduct driving from home to an outside office. You can also deduct driving from home to pick-up a passenger if you’re a Uber or Lyft driver.
Can You Deduct Internet If You Work From Home?
You may deduct a portion or all of your Internet expenses. You can only deduct it if you use the Internet specifically for work purposes. Many of you likely use it for business and personal reasons, though.
If you use the actual expense method for your home office deduction, you can deduct the portion you use for work. If you use the Internet at home 20 percent of the time for business, deduct 20 percent of your costs.
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