How to qualify for the home office tax deduction

Who is eligible for the home office deduction?

“The home office deduction allows business owners to deduct a portion of their home expenses as a business deduction,” said Alexis Woodward, a certified financial planner and co-founder of Blend Wealth in Indianapolis. “A business owner who does not have a physical office location outside of their home qualifies for this deduction. The deduction is available to both renters and homeowners.”

And it doesn’t have to be a room in your home. The IRS allows you to take the home office deduction on any free-standing structure you own, including a garage, barn, workshop or studio.

There are a few criteria you need to meet to be eligible, including:

• Exclusive use: The home office area must be used exclusively for business. If the space is used for personal and business activities, you generally cannot deduct home office expenses. An exception is if your space is a day care for children, older adults or those with a disability. The IRS lets you fully deduct the area used for care in those circumstances, even if it’s a mixed-use space.
• Regular use: If you have a home office that you don’t use regularly, you cannot take the home office deduction. It must be used on a regular basis to qualify. There is no defined qualifier for regular use other than the IRS stating in Publication 587 that “you must consider all facts and circumstances in determining whether your use is on a regular basis.”
• Principal place of business: The home office must be your principal place of business activities. If you have multiple locations or offices, the home office must be used for most important business activities, including “administrative or management activities.”

The types of expenses that are eligible for the home office deduction include:

• Mortgage interest
• Real estate taxes
• Homeowners insurance
• Utilities
• General maintenance and repairs
• Direct repairs or improvements to the office space
• Depreciation

You can deduct a portion of these expenses based on the size of your home office compared to the total square footage of your home. Direct repairs and improvements to the office space are fully deductible in most cases.

» MORE: Tax deductions for homeowners

How to calculate the home office deduction

There are two main ways to calculate your home office deduction: the simplified method and the actual expenses method.

“The simplified method caps your deduction at $1,500,” Woodward said. “Most of our clients have more home expenses than $1,500, so the actual expenses method typically gives them a larger deduction.”

Simplified method

The simplified method for calculating your home office deduction is a simple formula based on the square footage of your office space:

For example, if your home office is 150 square feet, you’d multiply that amount by $5 to get your total deduction:

This method is only available for office spaces of up to 300 square feet, so the maximum deduction would be $1,500.

Actual expenses

The second method for calculating your home office deduction is the actual expenses method. This involves calculating the actual expenditures of your home — including direct expenses related to the home office — and applying a portion of them to the home office.

The calculation for actual expenses is done by dividing the square footage of the home office by the total square footage of the home. Then you multiply that percentage by the total actual expenses for your home.

For example, if your home office is 150 square feet and your total home square footage is 1,500 square feet, here’s the calculation:

Once you know the percentage, you can add up your total eligible expenses and multiply it by that percentage.

So if you have $10,000 in total expenses (mortgage interest, real estate taxes, utilities, etc.), then your deduction would be calculated:

It’s a good idea to calculate the actual expenses for your home office and compare that number to figures from the simplified method to see which method gives you a bigger deduction.

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How to claim the home office deduction

To claim the home office deduction, you’ll need to fill out IRS Form 8829 and submit any supporting documentation requested. This form will help you figure out the allowable office space you can use, the amount of actual expenses you can deduct and the amount of depreciation you can claim.

It’s important to review the instructions for Form 8829 to ensure you accurately fill it out. Any mistakes could end up with an audit by the IRS, including a physical inspection of your home office space to ensure you are following all of the rules outlined in IRS Publication 587.

It is critical to keep detailed records of any expenses you deduct for your home office, including mortgage interest, taxes, insurance costs, utility bills and other documentation that showcases what you’ve spent. And you should make sure to avoid any personal items in your office that could indicate personal use of the space.

Overall, if you keep good accounting records for your business and home expenses, you should be able to deduct home office expenses without issue.

Bottom line

The home office deduction can help self-employed individuals and small business owners reduce their income taxes. You can deduct a portion of your rent or mortgage interest, real estate taxes, utility costs and even general repairs and maintenance.

But there are some specific requirements you must meet to qualify for the deduction. Primarily, the space must be used only for business purposes in most cases — and it must be your primary place of business. If you plan on claiming the home office deduction, be sure to research the requirements in IRS Publication 587 to avoid any tax filing mistakes.