In a year when so many people are working from home, the subject of the home office deduction will inevitably be on the minds of self-employed people. Luckily, if you’re both self-employed and using a portion of your home for work, there’s a very good chance that you’re eligible to deduct a portion of your home expenses as a business expense by taking advantage of this deduction. Below we’ll go through the eligibility requirements for this deduction, how to calculate your deduction, and some tips and tricks to keep in mind when preparing to claim this deduction on your tax return.
When you’re self-employed, you can deduct your business-related expenses on your tax return. This allows you to lower your business profit, the amount of business income you’re taxed on. The more you deduct, the lower your business profit and your tax bill.
If you use a portion of your home to conduct business, then you can deduct a portion of the cost of maintaining your home. This means that a percentage of home expenses (like rent or mortgage payments, utilities, maintenance, homeowner’s insurance, etc.) are deductible on your Schedule C as a business expense.
Any type of home can qualify you for this deduction; in this case, “home” can apply to houses, apartments, condos, mobile homes, houseboats—you name it. If the location in question provides “basic living accommodations,” it counts!
Home offices can come in many shapes and sizes. Spare bedrooms, an office setup in your living room, basements—all of these could qualify as “home offices” for the purpose of the home office deduction. The space in question doesn’t have to be “marked off by a permanent partition” (i.e. have four walls around it) in order to count as a home office.
Separate, free-standing structures can also qualify you for this deduction. Conducting business out of garages, barns, studios, or other separate structures on your property can qualify that location as a “home office.”
There are a few very important requirements that you’ll need to meet if you’d like to claim the home office deduction:
You must be self-employed. This deduction only applies to people who work from home, and are not traditional W-2 employees. Employees who work from home used to be able to deduct their home office expenses as an itemized deduction on Schedule A, but that deduction was removed with the Tax Cuts and Jobs Act of 2017.
You must own or rent the property in question. You can only deduct the expenses of a property that you’re responsible for maintaining. You can't claim the home office deduction if you live with a friend or family member but aren’t responsible for the property (or any of the costs to maintain it).
The home office must be your principal place of business. If you conduct business in more than one location, that’s ok! If you take the home office deduction, you just need to make sure that the home office in question is where you work regularly. For example, if you work primarily from a food truck, and occasionally and irregularly do work from your spare bedroom, then that spare bedroom space wouldn’t count as your “principal place of business.”
The home office must be used regularly and exclusively for work. This requirement is non-negotiable to the IRS—in order for a home office to qualify you for the deduction, you must use that space regularly (as in, for a substantial percentage of the year), and exclusively for work (as in, that area of your home is only used for work, and nothing else). For example, if you use a spare bedroom as both an office and as a playroom for your kids, then it doesn’t meet the “exclusive use” test.
You have two options for how to calculate your home office deduction. Similar to deducting vehicle expenses, you can either deduct a percentage of all of your actual home expenses (the “Regular Method”), or you can deduct a flat rate per square foot of your home office (the “Simplified Method”).
This deduction method involves deducting a percentage of your home expenses. You’ll essentially deduct the “business percentage” of the expenses that you incur to maintain your entire home (“indirect expenses”), such as:
Homeowner’s or property insurance
Rent or mortgage payments
Maintenance or repairs
You can also deduct some expenses that are directly related to your home office. Repairs to the space you’re using for work, painting, or light renovation would be “direct expenses” that you can deduct in full, instead of just the business percentage.
Calculating the “business percentage” of your home involves finding the total square footage of your home office, and dividing it by the square footage of your entire home.
Let’s say you have a home that’s 1,000 square feet. You use your spare bedroom as a home office, which is about 200 square feet. The percentage of your home that’s being used as a home office would be 20% (200 / 1,000). You’d then deduct 20% of your home expenses—which means 20% of your utilities, mortgage payments, insurance, etc. This deduction can really add up!
There’s one catch to the home office deduction: Your deduction can’t exceed your business’ gross income.
If your gross income exceeds your home office expenses, you’re in the clear. You can deduct all of your allowable home office expenses.
If your gross income is less than your home office expenses, then you’ll face a limit to how much you can deduct for your home office. Here’s how the IRS asks that you calculate your allowable deduction:
Find your gross income from your business
Subtract any home expenses you could deduct even if you didn’t use your home office for work. These expenses include casualty losses, real estate taxes, mortgage interest, and any other home-related expenses that you could deduct on a Schedule A (if you itemize your deductions).
Subtract any directly related expenses from using your home office. Remember, these are the expenses that aren’t related to the general upkeep of your entire home, but rather the expenses that relate only to your home office (such as a separate phone line, office supplies, etc.)
The number you have left over is your home office deduction limit.
This deduction method involves finding the total square footage of your home office and deducting a flat rate of $5 per square foot (up to a limit of 300 square feet). The same spare bedroom in the above example would get you a deduction of $1,000 ($5 x 200 square feet).
Generally, you’ll want to choose the method that gives you the biggest home office deduction. For the first year in which you’re deducting your home office expenses, it’s a good idea to calculate your total deduction amount using both the Simplified Method and the Regular Method, to see which option gives you the most tax savings.
That said, we also recommend keeping in mind that your time is valuable. If the Regular Method gets you a higher deduction, but the time and effort involved in calculating the business percentage of all of your home expenses is not worth the extra tax savings, then choosing the Simplified Method could give you a much-needed break from bookkeeping since the effort involved is so much lower.
If you use the Regular Method by deducting a portion of all of your home expenses, you'll want to keep the same kinds of records for your home office expenses as you do for any other business expenses; noting the date, amount, merchant, and business purpose of any expense will help you keep an accurate tally of your deduction, and will help protect you during an audit.
If you use Found as your business bank account, you can track your home expenses in your Found account so that your tax bill is consistently up-to-date.
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