Who Can Take the Home Office Deduction?

Photo by Matt_Moloney from Freerange Stock

Working from home isn’t new, especially for self-employed people. But during the height of the pandemic, millions of jobs were moved from employers’ premises to employees’ private homes. Many continue working from home and wonder if they qualify for the home office tax deduction.

The short answer is: Only if you’re self-employed. As a result of a Tax Cuts and Jobs Act (TCJA) provision that eliminated the ability to claim miscellaneous itemized deductions for unreimbursed employee expenses, employees can no longer deduct home office expenses. (This TCJA provision is scheduled to expire after 2025, so this deduction may be restored.)

Even if you’re self-employed, the rules are strict to qualify for the home office deduction. Here’s a rundown.

Who’s Eligible?

You can deduct your home office expenses if you’re self-employed, your home office space is used exclusively for business, and you meet any of these three tests:

1. Your home office is your principal place of business.

This means your home office is regularly used to conduct most of your business. This requires meeting one of two tests: the “management or administrative activities test,” where the office is used for tasks and meets specific criteria, or the “relative importance test,” where the home office is the most critical location for conducting your business.

2. Your home office is where you meet customers.

To pass this test, you must regularly use your home office to meet or deal with patients, clients or customers who must physically visit the office.

3. Your home office is in a separate structure.

This applies to an office used regularly for business located in an individual, unattached structure on the same property as your home. For example, this could be an unattached garage, artist’s studio or workshop.

You may also be able to deduct the expenses of specific storage. Suppose you’re selling products at retail or wholesale, and your home is your sole fixed business location. In that case, you can deduct home expenses allocable to space you use to store inventory or product samples.

What Can Be Deducted?

If you’re eligible, you can deduct “direct” home office expenses, such as painting, repairs and depreciation for office furniture. “Indirect” costs, like the portion of utilities, insurance, depreciation, mortgage interest, real estate taxes and casualty losses attributable to your office space, are also deductible.

Alternatively, you can use the simplified method to calculate the deduction. Under this method, you can deduct $5 per square foot for up to 300 square feet (maximum of $1,500 per year). Although you won’t be able to depreciate the portion of your home that’s used as an office, you can claim mortgage interest, property taxes and casualty losses as itemized deductions on Schedule A to the extent otherwise allowable, without needing to apportion them between personal and business use of your home.

If your home office is your principal place of business, transportation costs between your home and other work locations are deductible rather than considered nondeductible commuting expenses.

It’s Complicated

Determining whether you qualify for the home office deduction and, if you do, the deduction amount can be complicated. Contact the office to discuss your situation.

408-252-1800

Contact Us

Photo by Matt_Moloney from Freerange Stock.

The Ins and Outs of the Home Office Deduction

The pandemic changed the landscape of work for a lot of people, including the numerous business owners who began running their businesses from their homes. Many are still working from their home offices, whether full-time or on a hybrid basis. If you’re self-employed and run your business from home, or perform certain functions there, you might be able to claim deductions for home office expenses against your business income.

How to Qualify

In general, self-employed taxpayers qualify for home office deductions if part of their home is used “ regularly and exclusively” as the principal place of business.

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if:

  1. You physically meet with patients, clients or customers on your premises, or
  2. You use a storage area in your home (or a separate free-standing structure, such as a garage) exclusively and regularly for business.

Keep in mind the requirement that the space be used exclusively for business. For example, if your home office is also a guest bedroom, you can’t deduct the entire space as a home office expense. But if you use the desk area of the room exclusively for business, you can deduct that portion of the room, as long as you otherwise qualify.

Expenses You Can Deduct

Many eligible taxpayers deduct actual expenses when they claim home office deductions. Deductible home office expenses may include:

  • Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,
  • A proportionate share of indirect expenses, including mortgage interest, rent, property taxes, utilities, repairs and insurance, and
  • Depreciation.

But keeping track of actual expenses can take time, and it requires organized recordkeeping.

The Simpler Method

Fortunately, there’s a simplified method: You can deduct $5 for each square foot of home office space, up to $1,500.The cap can make the simplified method less valuable for larger home office spaces. Even for small spaces, taxpayers may qualify for bigger deductions using the actual expense method. So tracking your actual expenses can be worth it.

When claiming home office deductions, you’re not stuck with a particular method. For instance, you might have chosen the actual expense method when you filed your 2022 return, but then use the simplified method when you file your 2023 return next year, and the following year switch back to the actual expense method. The choice is yours.

More Considerations

The amount of your deductions is subject to limitations based on the income attributable to your use of the office. Other rules and limitations may apply. But eligible home office expenses that can’t be deducted because of these limitations can be carried forward and may be able to be deducted in later years.

Also be aware that, if you sell a home on which you claimed home office deductions, there may be tax implications. Contact us for more information.

A Valuable Deduction

You might be wondering why only business owners and the self-employed have been addressed here. Unfortunately, the Tax Cuts and Jobs Act suspended home office deductions from 2018 through 2025 for employees, even if you’re currently working from home because your employer doesn’t provide office space.

But the home office deduction can be valuable to those who’re eligible for it. We can help you determine if you’re eligible and the best method for claiming the deduction in your situation.

San Jose: (408) 252-1800
Watsonville: (831) 726-8500