Home office deductions: Who qualifies and how to calculate

If, like 34% of other solopreneurs, your home doubles as your headquarters, then you may qualify for the home office tax deduction this tax season. Whether you’re self-employed, own a small business, or work from home in any capacity, this deduction can help you cover the costs of maintaining a home office. 

Our guide explains who qualifies and which calculation methods to use—plus, we share five potential home tax deductions for this tax season.

Jump to:

• Who qualifies for the home office tax deduction?
• How the home office tax deduction works
• How to calculate home office tax deduction
• Home office tax deductions to take this tax season
• How to fill out Form 8829
• Common home office deduction mistakes to avoid
• Find peace of mind come tax time
• Home office tax deduction FAQ

Who qualifies for the home office tax deduction?

The home office tax deduction is taken on Schedule C of your Form 1040 and requires the use of Form 8829 to calculate the deduction. This deduction offers two distinct qualifiers: regular and exclusive use and principal place of business.

The type of work you do and the business you run can affect which qualifier you'll use for the at-home office tax deduction. Let’s explore which method is best for you.

Regular and exclusive use requirement

The regular and exclusive use qualifier requires that you use a specific area within your home exclusively for business purposes and dedicate it to work-related activities regularly.

For your home business to qualify, this means:

• You should solely devote the designated area to relevant business tasks.
• Refrain from engaging in personal activities or family use.
• Regular and consistent business use is essential to qualify.

To claim the deduction, you can only use the space you're claiming for your business purposes. In other words, you can't use the space as a guest room or for other personal activities. The IRS wants to see that the space is clearly dedicated to your business activities. This also means you must use the space regularly for business, not just occasionally.

Examples:

• A spare bedroom used solely as an office
• A dedicated corner of a living room used only for business with clear boundaries (like a room divider)
• A detached garage converted into a workspace

To successfully claim this deduction, it's crucial to maintain a clear separation between your business and personal spaces within your home.

Principal place of business rules 

The principal place of business qualifier focuses on whether the home is the primary location for substantial administrative or managerial activities related to your business.

To qualify for the working from home office tax deduction, this means:

• Your home must be the central hub for significant business-related functions.
• Substantial managerial or administrative activities take place within the home.
• You hold client meetings in your home office whenever necessary.

This option is ideal if you conduct business activities both inside and outside your home. If your home is where you primarily manage your business, even if you meet clients elsewhere or perform other work tasks outside the home, you might qualify. The key is that your home office is essential to the overall operation and management of your business.

Examples:

• An online retailer who manages inventory, processes orders, and handles customer service from their home office
• A consultant who conducts client calls, writes proposals, and manages projects from their home office
• A therapist who sees clients in a dedicated space in their home and also uses the space for administrative tasks

Using your home as your principal place of business can be a significant advantage when claiming the home office deduction, especially if you don't have another fixed business location.

Who doesn’t qualify

While the home office deduction can be a valuable tax break, it's not available to everyone. Here are some common situations where you wouldn't be eligible:

• Employees (W-2 employees): If you work for an employer and receive a W-2, you generally cannot claim the home office deduction, even if you work from home regularly. This deduction is primarily intended for self-employed individuals and small business owners who use their home as a place of business.
• Hobbyists: If your home-based activities are primarily a hobby rather than a for-profit business venture, you won't qualify. The IRS requires that your activities be conducted with the intent to make a profit. Factors they consider include whether you keep business records, advertise your services, and have a separate business bank account.
• Mixed-use spaces: If the space you're claiming is used for both business and personal activities, it doesn't qualify. The exclusive use rule requires that the space be used only for conducting business. For example, if you use a spare bedroom as both an office and a guest room, you can't claim the deduction.

Carefully review the IRS guidelines to determine your eligibility. If you're unsure whether you qualify, it's always a good idea to consult with a tax professional.

How the home office tax deduction works

When calculating your work-from-home office tax deduction, you have two options to choose from—the simplified method or the regular method. Here’s a quick overview of how both calculations work according to the IRS:

Now that you’re familiar with the basics, let’s explore both calculation methods to help you decide which one is best for your business this tax year. 

Simplified method

If you're looking for a hassle-free way to calculate your home office deduction, the simplified method might be perfect for you. This method is especially popular with those who have smaller home offices and prefer to avoid complex calculations.

• You receive a standard deduction of $5 per square foot
• This can apply to up to 300 square feet
• The deduction can’t exceed $1,500 

One of the main advantages of this method is that you don't have to calculate depreciation on your home. With the regular method, you depreciate the portion of your home used for business, which can get complicated. 

The simplified method eliminates this step, making your tax calculations much easier. You also avoid the potential recapture of depreciation when you sell your home.

Regular method

While the simplified method offers convenience, the regular method can potentially result in a larger tax deduction, especially if you have a larger home office or significant home-related expenses. However, it requires more detailed record-keeping and calculations. Here's how it works:

• Calculate the percentage: You'll need to determine the percentage of your home's square footage that is used exclusively for business. This percentage is then applied to your eligible home-related expenses.
• Deductible expenses: You can deduct a portion of various expenses, including mortgage interest or rent payments, real estate taxes, utility costs, and more. 
• Direct expenses: In addition to the indirect expenses listed above, you can also deduct 100% of direct expenses related to your home office. These are expenses that solely benefit the business portion of your home. 

The regular method requires meticulous record-keeping. You'll need to track all your home-related expenses and maintain documentation to support your deductions. This includes receipts, invoices, and bank statements.

How to calculate home office tax deduction

After you select which method will work best for your business, here's a step-by-step breakdown of how to calculate your deduction.

To calculate how much of a home office tax deduction you qualify for the simplified method:

• Determine the square footage of your home office space: Measure the area of your dedicated workspace accurately.
• Multiply your home office square footage by $5: This is the standard deduction rate.
• Calculate the total: This is your home office deduction.

Square footage of home office * $5 = Home office deduction 

Let's say your home office is a 100-square-foot room used exclusively for business. Using the simplified method, your calculation would be:

100 square feet * $5/square foot = $500

In this example, your home office deduction would be $500.

Here's how to determine your deduction using the regular method:

1. Determine the percentage of space your home office takes up in your home: Measure the square footage of your dedicated workspace and divide it by the total square footage of your home. This gives you the percentage of your home used for business.
2. Calculate the deductible amount of your indirect expenses: Indirect expenses benefit both your business and personal use of your home. Multiply the percentage calculated in Step 1 by your total annual indirect expenses. 
3. Add your direct expenses: Direct expenses are those that solely benefit the business portion of your home. These might include painting the office, repairs to the office space, or dedicated office furniture.
4. Calculate the total: This is your home office deduction.

(Home office square footage / Total home square footage) * Indirect Expenses + Direct Expenses = Home office deduction

Let's say your home office is a 100-square-foot room used exclusively for business, and your total home is 1,500 square feet. This means you use approximately 6.67% of your home for business (100 / 1,500 = 0.0667). 

Now, let's assume your eligible indirect expenses for the year (mortgage interest, property taxes, utilities, insurance, etc.) total $20,000. To calculate the deductible portion, you would use the following formula:

In this case, the calculation would be:

(100 square feet / 1,500 square feet ) * $20,000 in indirect expenses + $500 in direct expenses = $1,833.33

So, your total home office deduction using the regular method would be $1,833.33.

This example still demonstrates the potential advantage of the regular method while using more realistic figures. It shows that even with a smaller percentage of home usage, the deduction can exceed the $1,500 cap of the simplified method if your indirect expenses are significant.

Whatever deduction you’re looking for, run the numbers to see which method would benefit you most. If the paperwork becomes too burdensome, expense-tracking software like QuickBooks Self-Employed can help you perform the calculations and make the right decision. 

Home office tax deductions to take this tax season

From workspace expenses to technology investments, uncover the deductions that can contribute to a more financially advantageous filing this tax season. Here are five IRS tax write-offs that your home office could potentially qualify for.

A percentage of your property-related payments

When calculating your home office deduction, you can deduct a percentage of your property-related payments. This means indirect expenses that benefit both your business and personal use of the home. The percentage you deduct is based on the proportion of your home used for business.

For example, if 25% of your home's square footage is used exclusively for business, you can deduct 25% of the following:

• Mortgage interest or rent payments
• Homeowners or renters insurance premiums
• Property taxes
• Utilities (electricity, gas, water, internet)

These deductions can significantly reduce your taxable income, especially if you have high housing costs.

Office furniture and décor

Furnishing your home office can be a significant expense. The good news is that you can often deduct the cost of these items, or direct expenses, as they solely benefit the business part of your home. This includes essential furniture like your desk and chair, as well as decorative items that enhance your workspace.

Here are a few examples of deductible office furniture and decor:

• Desk
• Chair
• Bookshelves
• Filing cabinets
• Lamps
• Artwork
• Rugs

Remember that you only deduct items you use exclusively in your home office. If you move a deducted item to another part of your home for personal use, it could raise red flags during an audit.

A business phone line or business-related calls

Staying connected is essential for any business, and your home office is no exception. While you can't deduct the cost of your primary personal phone line, you can deduct expenses related to a separate business phone line or business-related calls on your personal line. These are considered direct expenses.

Here are a few examples:

• The cost of a second landline used exclusively for business
• The cost of a dedicated business cell phone
• Long-distance calls made for business purposes on your personal line
• Fax line rental

If you use your personal phone for both business and personal calls, you can deduct the portion of your bill that relates to business use. You'll need to keep detailed records of your calls to support this deduction.

Office repairs and improvements

Maintaining a home office often involves repairs and improvements. The good news is that many of these expenses are tax-deductible. These fall under the category of direct expenses, as they benefit the business use of your home.

Here are a few examples of deductible repairs and improvements:

• Painting your home office walls
• Repairing a leaky faucet in your office bathroom
• Replacing broken tiles on the office floor
• Upgrading your office lighting

Note that larger improvements, like replacing the entire carpet in your office, might be considered capital expenses. These expenses are typically depreciated over time rather than deducted all at once.

Home maintenance and improvements

Maintaining your home involves various expenses, and if you have a home office, you can deduct a portion of these costs. These are considered indirect expenses, as they benefit both your business and personal use of the home. The deductible amount is based on the percentage of your home used for business.

Here are a few examples of deductible home maintenance and repair expenses:

• Cleaning services
• Lawn care
• Snow removal
• Pest control
• Repairs to your home's heating or cooling system
• Roof repairs

It's crucial to accurately calculate the business-use percentage of your home and only deduct the appropriate portion of these expenses. Overstating deductions can lead to an audit, so it's important to be careful and keep good records.

Depreciation

When calculating the home office deduction using the regular method, consider depreciation. 

What is Depreciation?

Depreciation is an accounting method that allows you to deduct a portion of the cost of your home over time, specifically the part of your home used for business. This is because the IRS considers the business-use portion of your home to be a business asset, and like most assets, it's assumed to decline in value over time due to wear and tear or age. 

Even though your home's overall value may increase, the areas you use for business are subject to wear and tear like any other business space. Depreciation accounts for this and allows for a deduction to offset your business income. 

For residential rental property, which includes a home office, the IRS uses a 39-year recovery period. This means you'll be taking depreciation deductions for many years.

Let's revisit our previous example and incorporate depreciation:

Remember, your home office is 100 square feet, and your total home is 1,500 square feet, meaning you use 6.67% of your home for business. Your eligible indirect expenses are $20,000, and you have $500 in direct expenses.

Now, let's add depreciation:

• Assume the basis of your home (purchase price plus improvements) is $300,000.
• The depreciable basis is $20,000 (6.67% of $300,000).
• The annual depreciation deduction is $512.82 ($20,000 / 39).

Here's the calculation with depreciation included:

(100 square feet / 1,500 square feet) * $20,000 indirect expenses + $500 direct expenses + $512.82 depreciation = $2,346.15

By including depreciation, the total home office deduction increases to $2,346.15.

How to fill out Form 8829

If you're claiming the home office deduction using the regular method, you'll need to complete Form 8829, "Expenses for Business Use of Your Home." This form helps you calculate the deductible expenses related to your home office. 

Here's a step-by-step guide to filling out Form 8829:

1. Provide basic information. This includes your name, address, and Social Security number.
2. Calculate the percentage of your home used for business. Divide the square footage of your home office by the total square footage of your home.
3. Report your home-related expenses. This includes items like mortgage interest, rent, utilities, insurance, and depreciation.
4. Calculate your direct expenses. These are expenses that solely benefit the business portion of your home, such as repairs or dedicated office furniture.
5. Determine your deductible expenses. Multiply your indirect expenses by the business-use percentage calculated in Step 2. Add this amount to your direct expenses.
6. Calculate your deduction. Follow the instructions on the form to arrive at your final home office deduction.

Remember to attach Form 8829 when you fill out Form 1040 when you file your tax return. Keep a copy of the completed form for your records.

Common home office deduction mistakes to avoid

Claiming the home office deduction can be a great way to save money on your taxes, but it's important to do it correctly. Many taxpayers make common errors that can lead to problems with the IRS, including an audit or even penalties.

Frequent mistakes to watch out for:

• Claiming the deduction as an employee: The home office deduction is only available to self-employed individuals and small business owners. If you're an employee who works from home, you cannot claim this deduction.
• Not meeting the exclusive use requirement: The space you claim must be used exclusively for business and on a regular basis. If you use the space for both business and personal activities, it doesn't qualify.
• Overestimating the square footage of your home office: Measure the area accurately to avoid inflating your deduction.
• Not keeping good records: Maintain thorough records of all your expenses, including receipts, invoices, and bank statements. This is crucial for supporting your deductions if you're audited.
• Deducting personal expenses: Only deduct expenses that are directly related to your business activities.
• Forgetting about depreciation: If you're using the regular method, don't forget to factor in depreciation of the business-use portion of your home.

Taking steps to avoid these common mistakes will help you ensure that you claim the home office deduction correctly and minimize your risk of an IRS audit. If you have any doubts, consult a tax professional for guidance.

Find peace of mind come tax time

Out of all of the small business tax deductions, qualifying for the home office tax deduction can potentially result in the largest amount of savings this tax year.

With two calculation methods to choose from and online accounting tools at your disposal, managing tax deductions for your home office can be made more manageable. As always, consult a tax professional to understand your options.