Home office tax deductions explained 

What is the home office tax deduction? 

If you’re self-employed, the home office tax deduction allows you to deduct expenses related to working out of your home, such as internet, utilities, and rent or mortgage interest.

Who qualifies for the deduction?

To qualify for the home office tax deduction, you must use a designated part of your home as your primary place of business, and you must be self-employed, a freelancer, independent contractor, or small business owner.

Remote W-2 employees do not qualify for the federal home office write-off, even if you work from home full time. This tax deduction was eliminated for employees by The Tax Cuts and Jobs Act in 2018. However, some states, like California and New York, allow employees to write off certain home office expenses on the state level.

What home office expenses can you deduct on your taxes? 

There are two types of home office expenses you can deduct from your taxable income, direct and indirect expenses.

Direct expenses 

Direct expenses are fully deductible and include costs directly associated with the office space, such as:

• Painting or wallpapering
• New flooring
• Repairs or maintenance in the office, like fixing or replacing a window
• Window coverings or treatments for office windows
• New shelves or cabinets
• New light fixtures
• A dedicated phone or internet line used exclusively for business

Take note that office equipment, like computers, chairs, monitors, desks, etc., is not included in the home office tax deduction. However, you can write it off separately through other deductions, such as Section 179 or bonus depreciation, which allow you to deduct the cost of business equipment all at once or over time.

Indirect expenses 

Indirect home office expenses are partially deductible based on the percentage of the home you use for work and are associated with the whole home. They include:

• Home internet used for both personal and business
• Rent or mortgage interest
• Property taxes
• HOA or condo association fees
• Homeowner’s or renter’s insurance
• Utilities
• Home maintenance and repairs
• Pest control
• Cleaning services

Two methods to calculate your deduction

You can use either the simplified method or the actual expenses method to calculate your home office tax deduction.  

The simplified method 

The simplified method is the easiest way to calculate your home office tax write-off. With this method, you’ll simply multiply the square footage of your office space (maximum of 300) by $5.

For example, let’s say your home office is 200 square feet:

200 x $5 = $1,000

Keep in mind that the maximum amount you can deduct with the simplified method is $1,500. That could be a much smaller amount than you could deduct with the actual expenses method, depending on your expenses and the size of your home office.

The simplified method is usually the most advantageous choice if you have a smaller home office and don’t have a lot of expenses to write off.

The actual expenses method 

As the name implies, the actual expenses method for calculating your home office deduction is based on what you actually spend.

When calculating your home office deduction using the actual expenses method, calculate your indirect expenses based on the percentage of your home that you use for your home office. To find the percentage, divide the square footage of your office by the square footage of your home, then multiply by 100.

For example, let’s say that your total home is 2,000 square feet and your home office is 200 square feet:

(200 ÷ 2,000) x 100 = 10%

In this scenario, you could deduct 10% of your mortgage interest or rent, home internet bill, utilities, and all other indirect expenses for your home office deduction, plus 100% of any direct expenses you have.

The upside of the actual expenses method is that it can often result in a much bigger home office tax deduction, especially if you have a bigger home office and significant expenses. The downside is that it requires you to be more diligent about keeping good records and will take longer to calculate when you file.

How to claim the home office deduction: Step by step

1. Make sure you qualify: You must be self-employed and your home must be your primary place of business.
2. Measure your office: Use your home office measurements to find your office space percentage.
3. Determine the best calculation method: Calculate your home office deduction amount using both methods, and choose the one that gives you the biggest deduction.
4. Gather documentation: If you are using the actual expenses method for calculating your deduction, make sure to have all the necessary documentation, like rent or mortgage interest statements, utility bills, etc. Keep all documentation for three years in case of an audit.
5. Complete Form 8829, Expenses for Business Use of Your Home: If you are using the actual expenses method, Form 8829 will walk you through calculating your direct and indirect expenses, as well as how to handle depreciation if you own your home. Form 8829 is not required if you are using the simplified method.
6. Claim the deduction using Schedule C (Form 1040), Profit or Loss from Business: If using the actual expenses method, transfer your deduction amount from Form 8829 to Schedule C. If using the simplified method, calculate your deduction directly on Schedule C.
7. File your return: File Form 8829 (if using the actual expenses method) and Schedule C with your return.

Can I claim the home office deduction if I work from home part-time?

Yes, as long as you are self-employed and your main place of business is your home, you can claim the home office tax break if you work from home part-time.

However, if you only work from home occasionally, and have another office space you operate out of most of the time, you cannot claim the home office deduction. You must also use your home office space exclusively for work. It cannot be a part-time space for personal use.

Can I claim both the home office deduction and the mortgage interest deduction? 

Yes, however, you cannot claim the same portion of mortgage interest on both deductions. When you claim the home office tax deduction using the actual expenses method, you can only claim the percentage allocated to your home office.

Let’s say your home office is 10% of the total size of your home. You can claim that 10% of your mortgage interest as the home office deduction, and the rest as the mortgage interest itemized deduction.

If you are self-employed and work from home, the home office tax deduction can be a powerful way to reduce your tax bill, but calculating your total deduction can be confusing. Get it right and get every dollar you’re owed with the help of your local Tax Pro.

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