If, like more and more Americans, you’ve embraced working from home, you may be wondering if you can write off your home office on your taxes.
The answer depends on a lot of factors, including how you use your home for work, whether you have a dedicated space for your home office and whether you own your own business, are self-employed or work for someone else.
If you do qualify for the deduction, you may be asking how much of a tax deduction you can qualify for and how much it will affect your taxes.
Step into our home office. This article will walk you through the basics of the home office deduction, how to determine if you qualify and how much you can realistically write off.
How Does the Home Office Tax Deduction Work?
Before we get into the details of writing off your home office on your taxes, it may be helpful to review what a tax deduction is.
With a tax deduction, the Internal Revenue Service (IRS) lets you deduct (subtract) a certain amount of money from your taxable income. This lowers your taxable income, which then lowers the amount you owe in taxes.
Let’s say you have a home-based business and earned $60,000 in taxable income. That would put you in the 22% tax bracket, so you’d owe $13,200 in taxes. Now let’s say you were able to write off $1,500 for the home office deduction. You’d only be taxed on $58,500 in taxes, so you’d owe $12,870 for a savings of $330 on your taxes.
If you’re a small business owner, you’re probably already writing off all kinds of business expenses as a part of your itemized deduction. So the home office expense should be just one more write-off.
While a tax deduction lets you subtract money from your income, a tax credit lets you deduct directly from your tax bill.
Who Is Eligible for the Home Office Deduction?
Even if you work from home or are self-employed, not everyone is eligible for the home office tax deduction. Your business, and the part of your home where you conduct your business, need to meet certain criteria.
If you’re a small business owner, self-employed or an independent contractor, your home office usually needs to meet one or more of the following to qualify for the tax break:
- Serve as your primary place of business or your primary place of work for administrative tasks
- Be a location where you meet patients, clients or customers
- Be a place where you store inventory and product samples or sell products sold in your trade or business
In-home daycare providers
To qualify for this home office deduction, you must be in the trade or business of providing daycare for children, persons age 65 or older, or persons who are physically or mentally unable to care for themselves.
You must also have applied for and been granted a license certification, registration or approval as a daycare center or family or group daycare home, based on state law, or have been granted an exemption.
In the past, there was some latitude with the home office requirements, and some work-from-home employees or others who didn’t meet the IRS criteria could still claim the exemption.
However, the 2017 Tax Cuts and Jobs Act restricted the ability of work-from-home employees to claim the deduction. So even if you have a dedicated home office space, simply working from home for your current employer means you probably won’t get the deduction.
Some states, including Arkansas, California, Hawaii, Minnesota, New York and Pennsylvania, provide a deduction for unreimbursed employee business expenses on your state income tax return.
What Counts as a Home Office for the Deduction?
Qualifying for the home office deduction isn’t just about the type of business you run when you work from home; the IRS also requires that your home office space meets certain criteria.
- Exclusive use: You may be able to make million-dollar deals from your kitchen table, but it won’t count as a home office. The space must be used exclusively for your home-based business.
- Regular use: You need to make consistent use of the space. What this means isn’t spelled out, so you don’t have to use it every single day. Instead, regular use can be determined at the discretion of the IRS.
- Principal place of business: The space needs to be your primary place of business. While you can have more than one business location, your home must serve as your principal place of business for a single trade or business.
The specifics for these criteria are open to some interpretation, and if you’re audited, the auditor will have a great deal of discretion over how they define these terms.
How Do You Calculate the Home Office Tax Deduction?
The IRS allows you to calculate your deduction using one of the following methods.
For the simplified option, you multiply the square footage of your home office space by $5. However, there’s a cap of 300 sq. ft., so the most you can deduct is $1,500.
For the standard deduction option, you can calculate the home office deduction as a percentage of your total home expenses, including your:
- Depreciation deduction (the loss of value of a property due to normal wear and tear)
- Mortgage interest
- Repair costs
- Property taxes/real estate tax
That percentage is called the business percentage and is based on the size of your home office, compared to the rest of your home. So if your home office is 300 sq. ft. and your home is 1,500 sq. ft., you’d be able to deduct 20% of your home expenses.
In this case, you’d need to have itemized deductions totaling over $7,500 in expenses to exceed the $1,500 cap of the simplified deduction.
If your home business is a daycare, you would calculate your business percentage based on time rather than square footage. Assuming you use your home as a daycare year-round, you would take the total hours that you used your home as a daycare and divide it by 8,760 (the total number of hours in a year).
So if you used your home as a daycare facility for 40 hours a week for 50 weeks out of the year (2,000 hours), your business percentage would be 22%.
Which Deduction Calculation Should You Use?
If you want to keep your tax return as simple as possible, and don’t want to take the time to calculate all your deductions and provide all the necessary documentation, you might want to go with the simple deduction.
On the other hand, if you’ve put time and money into your home to maintain it for your home business, you may get a larger deduction from the standard deduction.
Get More Out of Your Home Office
Even if you have an office to go to, you may still feel like you’re carrying your work home with you. However, that doesn’t mean you get to take advantage of the home office tax deduction.
However, if you are running a business from home or meet the requirements, the deduction could be an easy way to save a little bit extra when you file your tax return.