The home office deduction topic often comes up when I speak with business owners. It’s been an even more popular subject in the last two years when COVID-19 has so many more people working from home. The thing is, however, everyone who works at home isn’t eligible for a home office deduction, even if she or he owns a business. As often happens when taxes are concerned, many rules apply for taking home office deductions.
Ask yourself these two questions to see if you are eligible for a home office deduction:
- Who is eligible for a home office deduction?
Only individuals who own a business can be eligible for the deduction. Yes, some employees used to be eligible under special circumstances, but those rules changed at the end of 2017. Now, only business owners who use space in her or his home exclusively and regularly to substantially conduct business operations can consider taking a home office deduction. Non-business activities cannot be conducted in the home office, including storing clothes in the closet.
- What home expenses can be deducted?
Deductible home office expenses are either direct or indirect. The deduction amount is based on the expense type and business percentage of the home used for business. The most common method used to calculate the business percentage is dividing the square footage used exclusively for business by total square footage of the living space.
- Direct Expenses: Expenses that benefit only the home area that is exclusively used for business, such as painting or repairs in the home office, are direct expenses that are fully deductible.
- Indirect Expenses: Expenses for keeping up and running the entire home, such as the mortgage interest, real estate taxes, insurance, utilities, and general repairs are deductible based on the business use percentage, described above. Shared spaces, like hallways, cannot be included in office space calculation. Some home expenses, such as lawn care, are not deductible.
For business owners who don’t want to hassle with tracking direct and indirect home office expenses, the IRS has a Simplified Option that allows a standard deduction of $5 per square foot, limited to 300 square feet.
Eligibility for a home office deduction is determined by a lot of rules. The basics are addressed here, but the topic can get complicated. It’s a good idea to get more details on the home office deduction and read examples of how to apply the tax rules on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction.