More and more people are embracing work-from-home (WFH) arrangements, perhaps because they are self-employed or their jobs sent them to work away from the office. However, while many people enjoy working from home, they often have to take on expenses when maintaining an office, ranging from buying office equipment to devoting a percentage of their home's energy resources to heating and cooling the space.
The good news is that they can claim certain deductions at tax time to offset the business expense use of home with Internal Revenue Service (IRS) Form 8829. The bad news is that there are limits on what can be claimed as expenses and who can claim them. Because of the number of improperly claimed deductions, the IRS tends to scrutinize this category very closely.
That said, if you have a legitimate claim, you should make it to recover some of the money you've had to invest in your home office business.
Does Your Home Office Qualify for a Tax Break?
While some homeowners can take deductions for their WFH expenses, others can't. The law changed in 2018 so that the deduction was removed for workers sent to do their job at home. Employed people working from home are not eligible for the tax break, even if they have to fund the expense of setting up and working from home without their employer's help.
If you're a freelancer, an independent consultant, or are doing a side gig between jobs, you're likely eligible to receive tax breaks for expenses related to at-home business activities.
How You Can Use Your Home for Business
According to IRS Topic No. 509 on the business use of a home, you must use a portion of your home as one of the following to be eligible:
- "Exclusively and regularly as your principal place of business for your trade or business"
- "Exclusively and regularly as a place where you meet and deal with your patients, clients, or customers in the normal course of your trade or business"
- "A separate structure that's not attached to your home used exclusively and regularly in connection with your trade or business"
- "On a regular basis for storage of inventory or product samples used in your trade or business of selling products at retail or wholesale"
- "For rental use"
- "As a daycare facility"
"Regular use" means that you use the home office space regularly, not on an occasional basis. Working at home a few days a year, even if you meet clients at these times, doesn't qualify you under this definition.
"Exclusive use" means that a specified space of your home is used only for trade or business purposes. It must be a room or other separately identifiable space, but it isn't required to be separated by a permanent partition. It shouldn't be used for personal purposes or contain personal-use furnishings. For example, if your family came to the office to watch TV or play video games when you weren't working, it might fail the exclusive use condition and torpedo your chances of getting a tax break (if this came to the attention of the IRS).
Your home office must also be your principal place of business, or it can be a place where you meet regularly with clients or patients. It doesn't have to be the sole place where you do business. For example, if you're a carpenter and do most of your work off-site, it can be the place where you do your administration and store your tools.
What You Can Write Off With a Home Business
According to IRS Publication 587, home expenses can be divided into three categories:
- Direct expenses, which apply to the home office only (such as redecorating the office)
- Indirect expenses, which apply to the whole home (such as utilities), including the home office
- Unrelated expenses, such as gardening or lawn care
Unrelated expenses, of course, can't be deducted by home office taxpayers. Direct expenses can be entirely deducted on your tax return, while indirect expenses are deducted proportionately. With utilities, for instance, you would figure out the square footage of your home office and then what proportion of your home's total square footage it occupies and use this figure to calculate what part of your utilities you can deduct.
For example, if your electricity bill is $1,200 a year and your home office occupies 10% of your total home square footage, you could deduct $120 for electricity for business use at tax time.
Examples of direct expenses you might be able to deduct include:
- Painting the office
- Repairs (solely on the home office and not for the entire home)
- Second business-only telephone line (the primary phone line can't be deducted)
- Computers and peripherals
- Office desk, chair, and other office-only furniture
Examples of indirect expenses you might be able to deduct include:
- Mortgage interest and mortgage insurance premiums
- Property taxes
- Repairs (not solely on the home office)
- Utilities and services
- Security system
How Do You Calculate Your Home Office Tax Deduction?
The IRS Form 8829 that you must fill out to apply for your home office deduction comes in four parts:
- Part I: Calculate the part of the home used for business purposes, usually dividing the total square footage of the house by the square footage of the home office.
- Part II: List your total business income along with your deductible expenses.
- Part III: Calculate the depreciation of your home, following the instructions to determine your allowable depreciation percentage.
- Part IV: Determine any unallowed expense amount that can be carried over to the next tax year.
To calculate your home office deduction, you have a choice between the regular method or a simplified option. The former is more complicated but may deliver you a bigger deduction. The simplified method is good if you like to keep things fast and easy.
With the regular method, you deduct your actual direct and indirect expenses for your home business with itemized deductions. If you had your office repainted or did repairs in the space, for instance, you would list these as 100% business deductions. Or, if your office space is 10% of your total house square footage, you would list 10% of the amounts of indirect expenses, such as furnace repairs, water and sewage service, and heating.
The depreciation section of Form 8829 involves a complicated calculation to determine a deduction amount for the wear and tear caused by normal use of the property over its useful life. The cost of the land, the date you started using the office, a deprecation factor, and the percentage of business use are parts of the formula.
With the simplified method (from Schedule C on the form), you just deduct $5 per square foot of your home office, up to 300 square feet. So, the maximum allowable deduction is $1,500. This certainly simplifies record-keeping but may come at a cost for the amount you are allowed to deduct.
Let Skynova Help Prepare You for Tax Time
Skynova can help simplify your life at tax time with our all-in-one invoicing and accounting software solution for small businesses. We make it easy for you to track your income and expenses and collect all the required information for your income tax filing. The software allows you to view financial reports, generate branded invoices, upload and organize expense receipts, and do much more.
Skynova can help you lighten your tax burden and worry less about drowning in tax forms so you can worry about work, not what you owe.