Looking for an extra tax break this year? If you’re self-employed and work from home, you may be able to leverage a home office deduction to reduce your gross income and save a few bucks in taxes.
This quick guide will help you understand:
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Whether you qualify for a home office deduction
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Which home office expenses you can include in the deduction
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2 methods for calculating a home office deduction
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Caveats and reminders that can help you avoid costly surprises
Let’s get to the good (money-saving) stuff.
Do You Qualify for a Home Office Deduction?
Let’s start with who doesn’t qualify: employed workers, even those working remotely. There’s often confusion around this because a home office deduction was previously allowed for employees—but home office deductions for employed workers ended with the Tax Cuts and Jobs Act of 2017.
If you’re self-employed or freelancing as an independent contractor, we’ve got good news: You qualify for a home office deduction, even if you’re just working part-time.
There’s just one caveat: To deduct a home office, you need to have—you guessed it—a home office. And it should meet 2 specific requirements:
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The space must be your primary place of business
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The space must be used regularly and exclusively for your business
Note the language above around primary, regular, and exclusive use because the IRS is picky about this. You won’t qualify for a home office deduction if you only use the area once in a blue moon because it’s not your principal place of business.
It’s important to note that your home office doesn’t need to be a separate building or room. A small, dedicated workstation such as a desk tucked into the corner of your family room could qualify, as long as you’ve designated that area for business use only.
What Can You Include in a Home Office Deduction?
A home office deduction is divided into 2 categories: direct expenses and indirect expenses.
Direct expenses are for items solely dedicated to your home office. This can include furniture items, hardware and other equipment, or any supplies you use in your business. You can claim 100% of direct expenses.
Indirect expenses are costs you incur that aren’t exclusive to the business. For example, you likely use the internet for both business purposes and streaming TV shows—therefore, you can only deduct a portion of your indirect expenses.
Here are some examples of indirect expenses:
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Rent
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Mortgage payments and interest
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Property taxes
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Renter’s or homeowner’s insurance
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Home security system fees
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Utilities like gas, electricity, and water
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Internet and cell phone bills
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Maintenance or general repairs
2 Ways to Calculate Your Indirect Expense Deduction
There are 2 methods you can use to determine what percentage of indirect expenses you can deduct.
Method 1: Actual Expense Percentage
Divide your home’s square footage by the square footage of your home office, then deduct the corresponding percentage.
Here’s an example of this calculation in action:
Let’s say your home is 3,000 square feet and your office area is 240 square feet.
240 square feet equals 8% of the home’s size, so you can deduct 8% of your indirect expenses.
Method 2: Simplified Flat Rate
The IRS-specific flat rate calculation is a deduction of $5.00 for every square foot of home office space up to 300 square feet (which is the maximum allowed using this method).
Using this method, the same 240-square-foot home office we used above would entitle you to a $1,200 deduction.
Note that using Method 2 may limit some of your other business deductions, such as depreciation, so you’ll want to consider the full financial implications before deciding on Method 2.
Which Method Is Best?
Tax professionals say the best method will depend on the size of your home and how many indirect expenses you have, as well as how motivated you are to track each indirect expense for the deduction.
If you have a larger home or a considerable amount of indirect expenses, you’ll likely be able to take advantage of a larger home office deduction using Method 1. If your home is smaller or you simply don’t want to do that much math, you may prefer Method 2.
Some Helpful Reminders to Avoid Costly Surprises
Home Sales Affect the Home Office Deduction
If you’re a homeowner who’s taking advantage of the home office deduction using the Actual Expense Percentage approach (Method 1), you may be liable for capital gains taxes when selling your primary residence.
Consult a tax professional if you’re considering selling your home so you can ensure you’re opting for the tax strategy that will be most financially beneficial.
Check In With Your Tax Professional
Each individual and business has unique tax requirements and circumstances, so be sure to partner with your tax professional to make the most of your home office deduction.
And be sure to save all records and receipts in case you need to reference them in the future.
For more details and various exceptions to the home office deduction guidelines, such as those for home daycare facilities, review the IRS instructions for Form 8829.
Next Step: Furnishing Your Home Office
Now that we’ve covered the tax breaks, let’s talk about something a little less complicated: Furnishing your home office (which can also be deducted on your taxes, by the way).
We’ve got desks, chairs, storage, lighting, and more for home offices of all shapes and sizes. Browse our buying guides for smart ways to turn your workstation into one of your home’s most comfortable spaces.
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