Home Office Tax Deduction 2023Reading Time: 5 minutes
The home office tax deduction can significantly help you reduce expenses on tax returns.
While the work-from-home culture is gaining momentum and is the default option for freelancers or the self-employed, it comes with bills and expenses that could take a big hit on revenue.
From the cost of electricity bills to the depreciation of office tools and rent increase, small business owners could save a lot of money on taxes by applying the home office tax deduction.
To be eligible, self-employed workers who want to take advantage of the write-offs or tax deductions must meet specific IRS requirements.
This article will provide details on the following:
- Who qualifies for the home office tax deduction?
- What qualifies as a home office?
- How to calculate home office deduction (simplified vs. regular method)
- What expenses are deductible for home office?
Let’s dive into the details.
Who qualifies for the home office tax deduction?
The “Gig economy” worker, Freelancer, Independent contractor, or the Self-employed who work from their own homes or rent office spaces can claim home office deductions.
The workspace can be a part of your single-family home, an apartment, an intermodal container, a studio, or a garage.
You should know that employees working from home due to mandatory office rules do not qualify. The 2017 Tax Cuts and Jobs Act (TCJA) suspended employee business use of home deductions from 2018 to 2025.
Also, employees who receive the W-2 from an employer are not eligible for the deduction.
What qualifies as a home office?
A home office is any part of your work area – rented or converted – that you use exclusively or regularly for business-related activities.
This work area could be a house, apartment, condominium, mobile home, boat, unattached garage, studio, barn, or greenhouse.
The IRS notes that a work area doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn, or similar businesses.
To qualify for work-from-home deductions on tax returns, you must meet the following criteria for the use of your home:
- The workspace must be exclusively and regularly the principal place of business operation.
- The workspace must be exclusively and regularly a place for business activities with your patients, clients, or customers.
- The work area must be a structure not attached to your home and used exclusively and regularly for trade or business.
- Retailers/wholesalers must use the workspace regularly to store business inventory or product samples.
- For rental use; or
- As a daycare facility.
How To Calculate Home Office Deduction
There are two options to calculate the home office deductions:
- Simplified Method
- Regular Method
This method allows qualified taxpayers to reduce a standard rate from taxes.
You can deduct up to $5 for every square foot of work area used exclusively for business purposes.
The IRS allows a maximum deduction of up to 300 square feet or $1,500.
For example, if your home office measures 200 square feet, the deduction would be $1,000 ($200 x $5). The space must be dedicated to business activities.
Any part of your house that doubles as an office, guest, or dining room don’t qualify.
This method requires more attention to detail and accurate record-keeping of expenses.
You will need to calculate the actual percentage of space used for your home office against the overall residence.
If the percentage claim on your home office is more significant than your gross income, you can’t deduct all. However, you can carry the excess deduction to the next financial year.
Let’s say you use 200 square feet of a 2,000 square feet home as office space…
Divide your office space by the total home space to find your percentage.
200/ 2,000 = 0.10
Your deduction will be 10% of your indirect home expenses, such as mortgage interest, insurance, utilities, real estate taxes, and general home repairs.
Below is an example:
|Expenses||Annual cost||Deductible (%)||Amount Deductible ($)|
You can also calculate the depreciation of the business portion of your home. You’ll have to consult the instructions on Form 8829 Expenses for Business Use of Your Home.
Simplified vs. Regular method
|The deduction is possible only when a portion of a residence is exclusively used regularly for business purposes.||The same conditions apply.|
|The percentage of your home used for business must be at most 300 square feet.||You can calculate the actual percentage of your home used for business.|
|There’s a standard $5 per square foot deduction rate.||Deduction depends on the actual expenses recorded and maintained for the home office.|
|Home-related itemized deductions claimed in full on Schedule A||Home-related itemized deductions apportioned between Schedule A and business schedule (Sch. C or Sch. F)|
|No depreciation deduction.||You can deduct depreciation for the portion of the home used for business.|
|No recapture of depreciation upon the sale of the home.||Recapture of depreciation on gain upon sale of the home.|
|The deduction cannot exceed your gross income.||The same condition applies.|
|You can’t carry over the excess amount in gross income limitation.||You can carry over the excess amount in gross income limitation.|
|Loss carryover from the use of the Regular method in the prior year may not be claimed.||Loss carryover from the use of the Regular method in the prior year may be claimed if the gross income test is met in the current year.|
What expenses are deductible for home office?
Direct and Indirect expenses are deductible. However, the amount of each deduction varies.
Indirect costs are partially tax-deductible, while direct costs are 100 percent deductible.
- Mortgage interest
- Home Insurance
- Home Utilities
- Real estate taxes
- Home repairs
- Internet expenses
- Cleaning services
- Painting your office
- Telephone bills
- Buying a computer
- Office desk and chair
Qualification for the home office tax deductions is determined each year, and eligibility may differ.
When recording expenses for tax returns, It would be best to consult a financial expert for advice on those that qualify for home office deductions.
Also, choosing a method with the most expense deductions would benefit your business.
Note that the Simplified method is more straightforward and less complicated but might not provide the most deductions for maximizing business revenue.
Frequently Asked Questions
Can I write off my Internet bill if I work from home?
- If an Internet connection is necessary to make money for your business, it is a direct expense and is deductible on your 1040 tax return documents.
Can I claim expenses without receipts?
- You should always keep a record of your business expenses, whether it be an invoice or payment receipt. If you do not have a receipt, ensure that you have detailed notes about the transaction.
How do I prove my home office is tax deductible?
- Keep documents or receipts showing your mortgage interest, property taxes, utilities, and purchases. Expenses on office tools, such as a computer, tables, chairs, or bookshelves, are 100 percent deductible.
What happens if you get audited and don’t have receipts?
- If you get audited and don’t have any proof of expenses, the Internal Revenue Service may disallow your deductions. This often leads to gross income deductions from the IRS before calculating your tax bracket.
What is “exclusive use”?
- This means you must use a portion of your home exclusively and regularly for your business.