What You Need to Know About the Home Office Deduction

What You Need to Know About the Home Office Deduction

For those who are self-employed, taxes are often a bit complex.  Separating business and personal use of items like your car and home requires understanding the importance of keeping personal and business activities separate, as well as thorough documentation of business use. Here’s what you need to know regarding using a space or room for the home office deduction.

Who Can Use the Home Office Deduction

You may qualify for a home office deduction if you are self-employed and file a Schedule C.  There are two additional requirements beyond self-employment.  The first requirement is that you do not have another space to use as an office.  There are two options here: 1. You do not have a separate area outside of your home. 2.  You do have another area, but it is inappropriate for your purpose, so your home office is your principle place of business.

The second requirement is that the room or area in your house is used for only your business activities.  If you occasionally use this room or area for any personal activity, you cannot take a home office deduction. Your home office space should not double as a guest or play room. It should be strictly reserved for business purposes.

Home Office Deduction Calculation

The home office deduction is calculated by taking a portion of all household expenses that is in relation to the square footage of the home office divided by the total square footage of the house.  For example, if you have an office in the home that is 100 square feet and your entire home is 1,000 square feet, you can take 10% of all home expenses.  If you own the house, you can take a portion of the mortgage interest, real estate tax, and insurance as well as a percentage of utilities and repairs.  If you are renting, you can take a percentage of the rent payment and a percentage of the utilities.

There is a simplified method to take a deduction if you do not want to keep track of utilities, etc.  Simply multiply $5 by the square feet of the home office (up to a maximum of 300 square feet).  Depending on how high your home expenses are, this simplified method could yield a higher deduction. It’s best to consult your CPA in this determination.

Home Office Deduction For Real Estate

You can take a home office deduction against a rental activity if you actively manage that rental.  It must reach the level of a trade or business.  You must be able to show that you participate on a systematic and continuous basis.  You can do this by performing services such as cleaning, managing, making repairs, advertising, or resolving problems with tenants.  Just remember that you do not want to pay self-employment taxes on a rental.  If you do not provide significant services, such as maid services, you are exempt from the self-employment taxes.

The IRS no longer allows any home office deduction on Schedule A against wages. However, certain states do still allow them (if they are in excess of 2% of AGI) if you benefit from itemizing on the state return.

The Home Office Deduction is a great tax benefit, but it is imperative to use the space properly and document accordingly. If you have any questions about this, please contact your hb&k advisor.


Marian Pekelder is the author of this blog.  A Manager at hb&k, Marian has over 25 years of experience and specializes in small businesses in a variety of industries including health care, retail, legal, construction and insurance. Email Marian to learn more.