A home office begins with a single chair planted in a room. From there it blossoms to include a desk of some sort, maybe a filing cabinet . . . or maybe not. A stack of dog-eared bills. A desktop computer (or at least a clearing where a laptop can thrive). Maybe a coffee mug filled with pencils . . . or maybe not. Your office could be pretty. It could be a mess. But on a basic level, a home office is where business happens.
And whenever business happens, the tax man will come a-knocking. The good news is that if you’re self-employed, you can get a home office tax deduction—even if your office smells like feet. (We hope not.)
Who Qualifies for a Home Office Tax Deduction?
We’ll get the bad news out of the way first. If you’re a salaried or hourly employee (the kind who receives a W-2 during tax season), you can’t take a tax deduction for your home office if you work from home.
Got small business tax questions? RamseyTrusted tax pros are an extension of your business.
The home office tax deduction is only for self-employed independent contractors. In other words, if you work full time as a freelancer or have a side hustle that requires an office, you might qualify to deduct a portion of your home’s expenses. (The home office deduction is one of several self-employment tax deductions.)
But before you can claim the home office deduction, you must satisfy some IRS criteria. Yes, the IRS has some pesky rules. Here they are:
Regular and Exclusive Use
The IRS regular and exclusive use requirement is just like it sounds—you must use your home office exclusively for business on a regular basis.1 This means that if you use your office for business and personal use, it’s not deductible.
Say you work on your laptop at your kitchen table, but that’s also where you serve your kids mac and cheese—your kitchen doesn’t satisfy the exclusivity requirement. And some free non-tax advice if you decide to work in a kid zone: You’re going to end up with a sticky keyboard if you aren’t careful.
Your office space doesn’t have to be an entire room. You could set up a desk in a 6-by-6-foot area of your bedroom and call that your office. You don’t need to build a cubicle or put up a curtain or anything like that. It just has to be designated office space.
The second component of the IRS requirement is regular use. This can be a little bit of a gray area because the IRS doesn’t define the term regular in days or hours. It just says that occasional use does not equal regular use.2 So, you can’t set up an office to get a tax deduction and never use it because you prefer working at a coffee shop down the street or . . . the sticky kitchen table.
Principal Place of Business
The principal place of business criteria means that you use your home office to handle administrative or management tasks. This can be things like keeping your books, paying bills, billing customers, or filing your taxes.
This criteria can be a little confusing if you do most of your work outside your home. Let’s say you’re a plumber who runs around town installing fixtures and rescuing homeowners from floods and clogs because Junior decided to flush an action figure. You might never do any plumbing in your home office, but as long as you use your office for administrative duties, it’s considered your principal place of business.
Exclusions to IRS Home Office Criteria
Well, there are exceptions to every rule, right? You don’t have to meet the exclusive use criteria if you’re licensed to use your home as a day care for kids, people with disabilities or seniors. Basically, it’s okay to mix personal and business use if you run a day care.
You also don’t have to meet the exclusive use criteria if you regularly use a portion of your home to store inventory. Say you sell books online and store them in your basement. You can occasionally store other things (like bikes you put away for winter) in the same area.
How Do You Calculate Your Home Office Tax Deduction?
Okay, you have to do some math to figure out your home office deduction. But don’t worry. It’s basic math. You won’t have to dig up your scientific calculator from high school, but you will need a tape measure or one of those fancy measuring apps on your phone.
Since you can’t deduct the entire cost of your home, you’ll need to figure out what percentage of your home is used for business. To do this, measure the length and width of your office in feet (it’s okay to round) and multiply those two numbers to get the square footage. Let’s say your office is 12-by-10 feet. That means it’s 120 square feet.
To find the percentage of your home used for business, divide the square footage of your office (120) by the total square footage of your home (we’ll keep it simple and say it’s 1,200). Boom. You can deduct 10% of your home’s expenses.
The IRS has two ways to calculate your deduction: the simple way and the not-so-simple way. Let’s look at the not-so-simple way first.
Actual Expense Method
The actual expense method lets you deduct a percentage of your actual expenses. So, what expenses can you deduct? Well, they include your utility bills (electricity, water and gas), rent, property taxes, mortgage interest, homeowners insurance, repairs and maintenance.3
The big thing to remember here is to keep records of all your expenses, so you aren’t left scrambling at tax time.
If you own your home, you can also take a deduction for depreciation, which is another term for wear and tear. The current IRS depreciation table allows you to deduct 2.461% of your home’s market value (excluding the value of land).4 So, let’s say you have a home valued at $300,000 ($200,000 for the home and $100,000 for the land). And 10% is dedicated to office space. That means your depreciation deduction is $200,000 x 10% x 2.461%. That gives you a grand total of $492.
But keep in mind that when you sell your home, you’ll have to pay a 25% depreciation recapture tax on the total amount of depreciation deductions you claimed over the years.5
If you don’t want to track down all those bills to compute your deduction (organizing documents is an underappreciated art form), the IRS offers a simplified method that calculates your deduction based on $5 per square foot of office space, up to a maximum of 300 square feet.6
But fair warning: If you use the simplified method, you might end up with a smaller deduction. So, a little extra time organizing your paperwork might be worth it in the long run.
How Do You Claim a Home Office Tax Deduction?
All right, you’ve figured out your home office percentage, so how do you actually claim your home office tax deduction? If you’re using the actual expense method, you’ll need to fill out Form 8829 to list all your home office expenses. Once you’ve got that number, you’ll enter it on a Schedule C.
A Schedule C is a two-page IRS form for reporting profit or loss from your business. In other words, if you’re self-employed, Schedule C is where you report the money you made and subtract your expenses to figure out your net profit.
If you decide to use the simplified method, you can enter your home office deduction directly on Schedule C.
Listen, a home office deduction can save you a nice chunk of change. Don’t take it for granted. And don’t worry about getting audited just because your tax return looks a little different. If you document your deductions and expenses, you have nothing to fear—except maybe some paper cuts from filing receipts.
Ask a Pro to Help
Taxes can get pretty complicated when you have self-employment income and home office deductions. If you’re feeling lost, a tax Endorsed Local Provider (ELP) can guide you through even the darkest tax jungle. That’s why they’re RamseyTrusted.