These days, it’s not uncommon for at least part of your home to double as office space. Whether you work from the couch or run your business from a designated room, you should know the tax implications of setting up a home office and claiming the home office deduction. Does it raise your chance of getting audited? Can you really deduct your rent payment? The home office deduction is not a free-and-clear opportunity to live tax-free. However, taken correctly, it can help to reduce the costs associated with running a business out of your home.
30-second summary
- You could qualify for the home office deduction if you regularly use a portion of your home to run your business
- Your home office must be the principal location where you conduct your business
- In most cases, you must use the office area exclusively for your business
- There’s a simplified square footage calculation to help you claim ($5 per square foot in 2022)
What is the home office deduction?
The home office deduction allows qualified taxpayers to deduct certain home-based expenses when they file their taxes. To claim the home office deduction on your tax return, you must exclusively and regularly use part of your home (or a separate structure on your property) as your primary place of business.
Who is eligible for the home office deduction?
If you’re one of the millions of remote workers now working from the dining table daily, you may be wondering if you can claim the home office tax deduction. Sorry to break it to you, but you won’t qualify for this tax break if you are a W-2 employee in a traditional employment relationship. However, you may be eligible if you’re a freelancer or own your own business.
Here are some more details to help you determine if they can claim the home office deduction:
- W-2 employees are not eligible.
- The deduction is available to both homeowners and renters.
- The term “home” doesn’t include any part of your property used exclusively as a hotel, motel, inn, or similar business.
- You must generally use the portion of the home office exclusively for conducting business on a regular basis.
- The home must generally be your principal place of business. You may also qualify if you conduct administrative or management activities at home and there is no other location to perform these duties.
- Some exceptions apply to daycare and storage facilities.
Home office deduction expenses typically include a portion of your mortgage interest, repairs, utilities, insurance, maintenance, depreciation, and rent. The percentage of expenses equals the percentage of your living space used as a home office.
Proceed with caution when it comes to claiming
The IRS has very specific rules it applies when evaluating whether or not a home office is truly a home office. A home office should be a space that is regularly and exclusively used for business. If you use a home office for business most of the time but spend the weekend surfing the web or relaxing in that room, you aren’t using the space exclusively for business. Following the rules is critical, as we saw in a 2014 tax court ruling on personal use of a home office that illustrated how restrictive the IRS is on home office rules. In the tax court case, the IRS took issue with the taxpayer simply walking through her home office to get from one side of the apartment to another.
For the case in question, the taxpayer had a small studio apartment in New York City. She used a portion of the studio apartment as her home office. Because of the size of her living space, the taxpayer had to walk through her “home office” to get to her bedroom. Ultimately, the tax court ruled that walking through her home office to get to her bedroom did not violate the exclusive use thresholds and allowed the deduction (Miller, TC Summ. Op. 2014-74). But as you can see from this example, the IRS gives serious consideration to the “regular and exclusive use” clause.
Here are some things to consider to protect your home office deduction
- Are you using the space exclusively for business? Or is it a family room that doubles as a home office?
- If it is not your primary business location, are you using the space to conduct regular business, including meeting with clients? Having space to take extra office work home on the weekends is not enough to meet the Principal Place of Business requirement.
- Is your home office in a high-traffic area of your home? The IRS is looking for reasons to disqualify the deduction. Can you see a TV from your desk?
- What recreational capabilities does your computer have? If your home office is also your gaming headquarters, that is not exclusive business use.
If you do have a space that meets the exclusive and regular use requirement and the principal place of business requirement, then we have some good news: you can use a simplified option when figuring out the deduction for business use of your home.
How the simplified home office deduction works
While most things having to do with taxes and the IRS tend to go from simple to more complex, the IRS does occasionally offer ways to make our lives easier. In this case, the IRS has simplified the method for calculating the home office deduction using a safe harbor calculation to replace the cumbersome allocation of home expenses. You can calculate the deduction by multiplying the square footage of your home/work area by $5 (up to 300 square feet), for a maximum deduction of $1,500. For example, if your home office measures 150 square feet, then the deduction would be $750 (150 x $5). This simplified option doesn’t change the criteria for who may claim a home office deduction; it merely simplifies the calculation and recordkeeping requirements of the allowable deduction.
The alternative to the simplified option is the regular method, in which deductions for a home office are based on the percentage of the home devoted to business use. You’ll need to figure out the percentage of the home used for business activities to deduct indirect expenses.
Consult before you claim
Before claiming the home office deduction, we highly recommend consulting with a CPA who can help ensure you’re following the rules, claiming what you can, and creating a robust tax planning strategy. Contact us if you would like to schedule a consultation.
Further reading: IRS Publication 587 has some good information on what records to keep and what qualifies as a home office deduction.