What is the home office deduction?
Small-business owners and freelancers who regularly and exclusively use part of their home for work and business-related activities may be able to write off rent, utilities, real estate taxes, repairs, maintenance and other related expenses. The home office tax deduction can be taken on Schedule C of Form 1040 (annual tax return).
» Need to back up? How tax deductions and write-offs work
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How does the home office tax deduction work in 2023-2024?
You can claim the deduction whether you’re a homeowner or a renter, and you can use the deduction for any type of home where you reside: a single-family home, an apartment, a condo or a houseboat. You can’t use it for a hotel or other temporary lodging. Here are the other conditions you’ll need to meet:
Regular and exclusive use
The space you’re using for business must be used exclusively for conducting business. For example, using a spare bedroom as both your office and a playroom for your children probably makes you ineligible.
There are two exceptions. If you provide day care services for children, older adults (65 or above) or handicapped individuals in that part of the house, you can probably still claim business deductions as long as you have a license, certification or approval as a day care center under state law, according to the IRS. The other exception is if you use the office for storage of inventory or product samples you sell in your business.
Principal place of business
Although your home office doesn’t have to be the only place you meet your clients or customers, it must be your principal place of business. That means you use the space exclusively and regularly for administrative or management activities, such as billing customers, setting up appointments and keeping books and records, according to the IRS.
Can I take the home office deduction as a work-from-home employee?
W-2 employees who work from home are not able to take the home office tax deduction. Prior to 2018, remote employees could write off some of their unreimbursed home office expenses as itemized deductions, but the Tax Cuts and Jobs of 2017 suspended this tax break until 2025.
If you are a freelancer, have a side hustle, or run your own business in addition to your W-2 job, you may be able to take the home office deduction. The office or space where you conduct this separate self-employed business can't be the same space where you also work as an employee, though. This line can get blurry very quickly — and there are other details to know, too. Make sure you're staying on the right side of the rules if you plan to claim this tax break.
» Need some help? How to find a CPA near you
How to calculate your home office tax deduction
You can determine the value of your home office deduction using one of two methods:
Simplified method: With the simplified option, you aren’t deducting actual expenses. Instead, the square footage of your space is multiplied by a prescribed rate. The rate is $5 per square foot for up to 300 square feet of space.
Actual expenses method: The regular, more difficult method values your home office by measuring actual expenditures against your overall residence expenses. You can deduct mortgage interest, taxes, maintenance and repairs, insurance, utilities and other expenses. You can use Form 8829 to figure out the expenses you can deduct.
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Simplified version vs. actual expense deduction
The choice of whether to use the simplified deduction, if you’re eligible for it, or to deduct actual expenses, depends mainly on which would net you the bigger tax deduction.
The actual expense method
If you use the actual expenses method, you can deduct direct expenses — such as painting or repairs solely in the home office — in full. Indirect expenses — mortgage interest, insurance, home utilities, real estate taxes, general home repairs — are deductible based on the percentage of your home used for business.
Example: Let’s say you paid $3,000 in mortgage interest, $1,000 in insurance and $3,000 in utilities (all indirect expenses) plus $500 on a home office paint job (direct expense) during the year. Your home office takes up 300 square feet in a 2,000-square-foot home, so you may be eligible to deduct indirect expenses on 15% of your home.
That could mean a deduction of $1,050 in indirect expenses ($7,000 in expenses, multiplied by the 15% of space used in the home), plus $500 for the direct expense of painting the home office, for a total deduction of $1,550.
» MORE: Popular tax breaks and tax deductions
The simplified version
If your home office is 300 square feet or less, and you opt to take the simplified deduction, the IRS gives you a deduction of $5 per square foot of your home that is used for business, up to a maximum of $1,500 for a 300-square-foot space.
In this case, using the simplified method could make more sense because you’d get only $50 more in deductions by documenting actual expenses. You should also consider the time it will take you to gather receipts and records.
The simplified method can work well for single-room offices and small operations.
The actual expenses method might work better if the business makes up a large part of the home.
Other home office deduction rules and considerations
Receipts. If you plan on deducting actual expenses, keep detailed records of all the business expenses you think you’ll deduct, such as receipts for equipment purchases, electric bills, utility bills and repairs. If you’re ever audited by the IRS, you’ll be prepared to back up your claims
Home sales. If you're a homeowner and you take the home office deduction using the actual expenses method, it could cancel out your ability to avoid capital gains tax on home sales. People who sell their primary residence after having lived in it for at least two of the five years before the sale generally don't have to pay taxes on up to $250,000 in profit on the sale, or $500,000 if married filing jointly, according to IRS Publication 523.
Depreciation. If you use the actual expenses method, you’re required to depreciate the value of your home. Depreciation refers to an income tax deduction that lets taxpayers recover the costs of property due to wear and tear, deterioration, or obsolescence of the property, according to the IRS. The depreciation you’re required to take in home office deductions is subject to capital gains tax when you sell your home. For example, if you own your home, use 20% of it as a home office and deduct depreciation, 20% of your profit on the home’s sale may be subject to capital gains tax. However, if you use the simplified method, depreciation isn't a factor and you may not be subject to the tax.
The rules on tax deductions for a home office can be hard to digest. Consider consulting with with a tax advisor or consultant or use the appropriate online tax software if you're unsure about how to proceed.
