Working from home has a variety of perks – like a flexible schedule and no dress code. It could also have tax benefits – for a limited number of people.
Who Qualifies for a Home Office Deduction?
Despite a much larger percentage of the population working remotely than ever before, a limited number of these workers can claim a home office deduction on their taxes. Since the 2017 Tax Cuts and Jobs Act, only those who are self-employed or independent contractors can deduct the direct and indirect expenses associated with a home office on their federal income taxes.
This tax code change sunsets at the end of 2025, so there may be changes in the future that widen the qualifications. However, for now the majority of those who have worked or are working from home due to the pandemic are unlikely to qualify for a federal deduction.
What Qualifies as a Home Office?
A home office is a room in your home, a portion of a room in your home, or a separate building next to your home – like a converted garage or barn – that you use exclusively and regularly to conduct business activities (a hobby does not qualify). It doesn’t matter if you rent or own; you are eligible in either case.
To qualify for a home office deduction, you must meet two threshold tests — the place of business test, and the regular and exclusive use test.
Place of business test
To pass this test, you must show that you use part of your home as:
- The principal place of business for your trade or business, or
- A place where you regularly meet with clients, customers, or patients
In some cases, you can also meet the principal place of business requirement if you conduct substantial administrative and management tasks for your outside business at home and have no other fixed location where you conduct these activities. These tasks might include billing customers, keeping books and records, ordering supplies, setting up appointments, or writing reports. For example, assume you're a doctor at a local HMO who's been given examination space but no office space. You use a room in your home regularly and exclusively to correspond with insurance companies, bill patients, and read medical journals. In another example, you have a home office you use on your farm or ranch to organize payments and records, communicate with business partners, track breeding information, create your annual plan, and keep up on breaking industry information. In such cases, your space would likely pass the place of business test for a home office deduction.
If your home office is in a separate structure next to your home, like a shed or garage, it needn't be your principal place of business. However, you must use that office regularly and exclusively in connection with your trade or business. Be sure you use this structure only for business purposes — you can't store your car or gardening tools there.
Regular and exclusive use test
In general, you must also pass the regular and exclusive use test before you can take a home office deduction, though exceptions apply for in-home day-care facilities and for sellers who use part of their homes for storing inventory. As the name suggests, this test requires you to show that you exclusively use a portion of your home for business purposes on a regular basis.
For example, assume you set aside one room in your home as your home office. You also use this room as a playroom for your children. Here, you wouldn't meet the exclusive use test. Now assume that you use one room in your home exclusively for your side business of selling insurance. You engage in this business only occasionally. Because you don't use the office on a regular basis, you still won't qualify for the home office deduction.
If you meet these thresholds, you’ll need to file the Form 8829 with the IRS.
What Can I Deduct?
You can deduct both your direct and indirect expenses associated with your home office. Direct expenses are costs that apply only to your home office, such as a business telephone line and the cost of painting the office. You can deduct these costs in full against your business income.
Indirect expenses are costs that benefit your entire home. You can deduct only the business portion of your indirect expenses. Some examples of indirect costs include rent, deductible mortgage interest, real estate taxes, and homeowners insurance. The business percentage of your home is determined by dividing the area exclusively used for business by the total area of the home. For example, assume your home is 2,000 square feet and your home office is 200 square feet. Your business percentage is 10 percent (200 divided by 2,000).
There is also a simplified method for calculating the deduction. Instead of determining and allocating actual expenses, you calculate the home office deduction by multiplying the square footage of the home office (maximum of 300 square feet) by $5. Since square footage is capped at 300, the maximum deduction available under the simplified method is $1,500. There are benefits and drawbacks to both calculation methods; a tax advisor can help determine which is right for you.
Even if you don't qualify for the home office deduction, you can still take a deduction for your regular business expenses, such as the purchase of file cabinets, business equipment, and supplies.
What Do I Need to Prove I Qualify?
Historically, the IRS has closely scrutinized home office deductions. Here are some steps you can take to prove the existence of your home office:
- Use your home address on your business cards, stationery, and advertisements
- Install a separate telephone line for your business
- Instruct clients or customers to visit your home office, and keep a log of those visits
- Log the dates, hours spent, and type of work performed in your home office
- Have business mail sent to your home
Your home office deduction is just one piece of your tax-preparation puzzle; it’s always best to speak with your tax professional about the complexities of your potential deductions. If you’re looking for financial planning advice, a Farm Bureau financial advisor can help you strategize to ensure both you and your business are set up for success.