The home office deduction: Who qualifies and how to calculate it

If you regularly work from home as a freelancer or small-business owner, you may qualify for the home office deduction to reduce your taxes. But there are specific rules for who qualifies and what work spaces are covered.

And keep in mind that if you’re an employee, you can’t claim the home office deduction, even if you work from home (though if you also have a side gig, you might qualify — more on that below).

What is the home office tax deduction?

The home office tax deduction is available to self-employed taxpayers who use part of their homes for business use, regardless of whether they own that home or rent it from someone.

The “home” could be a house, apartment, condominium or other property that someone lives in, and a “home office” could be a room in a house or an unattached garage, studio, barn or greenhouse on a taxpayer’s property. It can’t include an area used as a hotel, motel or inn.

Importantly for those seeking this tax deduction, the office must be used “exclusively and regularly” for business purposes, according to the IRS.

“It cannot be your dining room table for business during the day, then your dining room table other times, or even a shared space of your guest room. It must be a section of your home or a separate building on your property,” says Mark Steber, chief tax officer for Jackson Hewitt Tax Services. It also has to be used on a regular basis, not just occasionally, for your work.

Special rules apply for businesses that provide daycare, whether to children, people ages 65 and older, or those who are unable to care for themselves. Special rules also apply if part of your home is used to store inventory. (See the IRS rules for more information.)

Who qualifies for the home office tax deduction?

To qualify for the home office tax deduction, you have to use your dedicated office space for a trade or business. The IRS offers this example on its website: If you use your office to research and make your own investments, you wouldn’t qualify for the deduction. But if you use your office as an investment broker or dealer for clients, you might qualify. The IRS website has a flow chart to help taxpayers determine their eligibility.

An eligible home office has to be your principal place of business and a place where you spend a lot of time working, doing such tasks as billing customers, ordering supplies or writing reports. You also may meet clients, patients or customers at your home office. While you can work from other places and still be eligible for the deduction, your home office has to be a main workplace for your trade or business.

Notably, you can’t claim the deduction if you are a remote employee, working from home for a business that is not your own. That said, if you are a regular employee of a company but also have a side gig — and you meet the exclusive and regular use requirement — you could qualify for the deduction.

How to calculate the home office deduction

If you qualify, there are two ways you can take the home office deduction: by using the simplified method or by adding up your actual expenses.

Simplified method: Generally, to calculate your deduction based on the simplified method, the square footage of the space being used by the business is multiplied by $5, not to exceed $1,500 (or 300 square feet). There are different rules for home daycare facilities.

When using this method to claim the deduction, you need to know the size of the area used for your home business and the gross income made from the business use of your home. You also need to keep track of other business expenses not related to the use of your home. The IRS provides a worksheet to calculate your deduction using the simplified method.

Actual expense method: To calculate your deduction based on the actual expense method, expenses are classified as direct or indirect.

• Direct expenses include improvements made to the room you are using as an office, including painting and repairs. Direct expenses often are fully deductible.

• Indirect expenses include the cost of running your entire home, including home insurance, utilities and general repairs. Indirect expenses are deductible for the percentage of space being used in your home for business purposes.

Other expenses considered “unrelated” to your business include costs of lawn care or painting a room in the home that isn’t used by the business. Those costs are not deductible.

Also, when you use this method, you can calculate the depreciation for wear and tear on the part of the home that is used for the business. But note: While depreciation can potentially decrease your taxes now, it could potentially increase taxes when you sell your home, Steber said.

To claim the deduction using this method, see IRS Form 8829.

Bottom line

Here are the key points to keep in mind before you claim the home office tax deduction:

• Regular employees of a company are ineligible for the home office deduction, unless they have a side gig in addition to that job and can meet the IRS requirements.
• The office must be used exclusively for your own business (although there are special rules for daycare and inventory use).
• Your home office needs to be used regularly, and should be the place where you do a sizable portion of your work.