Updated Jan. 1, 2019 to incorporate the new tax law.
The home office deduction can save you taxes. It allows you to deduct a part of your rent or mortgage payments, utilities and other home expenses. It can also increase your business mileage deduction.
Here's what to know about the home office tax deductions for small businesses and self-employed.
We'll dive into the specifics about the home office tax deduction below. The key takeaways you should know are:
If your home office is 300 square feet or less, the IRS has an optional simplified method of calculating your home office deduction. You can deduct $5 for every square foot of your home office up to a maximum of $1,500. For example, if your home office is 200 square feet, you'll get a $1,000 deduction.
Here's a quick comparison of the two methods for taking a home office deduction:
Criteria Traditional Method Simplified Method Amount of space Percentage of your home used for business Cannot exceed 300 square feet Amount of Deduction Actual costs associated with home office $5 per square foot How to Deduct Home-related itemized deductions apportioned between Schedule A and business schedule (Sch. C or Sch. F) Home-related itemized deductions claimed in full on Schedule A Depreciation Deduction? Applied to portion of home used for business purposes No depreciation deduction Can Deduction Exceed Gross Income? No, deduction cannot exceed gross income from business use of home minus business expenses Same Can Excess of Gross Income Limitation Be Carried over? Yes No Requires Documentation? Yes Yes
A home office is a place in your home that is used exclusively for business purposes. The IRS offers taxpayers a home office deduction to offset a portion of the costs of their home offices.
The home office deduction allows independent contractors, small business owners and others to lower their taxable income. In general, it's meant for independent contractors but there are circumstances where W2 workers can take this write-off.
To qualify for this deduction, you must meet three threshold requirements:
You must meet all three threshold requirements. You must also meet any one of the following requirements:
You must be in business to take this deduction. You can't get the write-off for a hobby or other nonbusiness activity that you conduct out of your home. Yet, you don't have to work full time in a business to qualify for this. If you meet the requirements, you can take the deduction for a side business.
If you're an employee in someone else's business, you can qualify for this. But, this is only if the home office is for the convenience of the employer.
You can only take this deduction if you use part of your home only for your business. If your home office is also used for personal reasons, you won't qualify for the deduction. The more space you devote only to your business, the more your deduction will be worth.
It's not enough to use a part of your home only for business‚ you must also use it regularly. You can't place a desk in a corner of a room and claim this deduction if you almost never use the desk for your business.
How much is "regularly?" It's not clear. The IRS only says you must use your home office for business on a continuing basis. One court has held that 12 hours of use a week is enough.
There is a good chance that you could also qualify with less use but no one knows for sure. You can keep track of how much you use your home office by making simple notations on a calendar.
You also must meet at least one of the following requirements to qualify for this deduction.
No. Tax reform removes the ability to claim miscellaneous itemized deductions, including the home office deduction.
The amount saved will depend on your costs. But, the home office tax deduction often provides significant tax savings because you may be able to include a portion of your mortgage or rent. Also, a home office deduction may unlock other deductions like an increased mileage deduction.
The traditional method includes the actual expenses you incur for your home. Such expenses fall into two broad categories: direct and indirect. Direct expenses are what you incur just for your home office.
This can include costs like painting your home office or paying someone to clean it. The entire amount of a direct home office expense is deductible.
An indirect expense is a payment for something that benefits your entire home. Most of your home office expenses will be indirect expenses, including:
You can only deduct part of an indirect expense: the percentage which relates to your home office. For example, let's say you're a renter and use 20 percent of your home for your home office. You'll be able to deduct 20 percent of your rent, utilities and other indirect expenses.
The IRS has created an optional simplified method of calculating your home office deduction. You deduct $5 for every square foot of your home office. Thus, all you need to do is measure the square footage of your home office.
For example, if your home office is 200 square feet, you'll get a $1,000 deduction. That's all there is to it. You can only use this method if your home office is 300 square feet or less.
In order to get the largest home office deduction, you'll likely have to use both methods to find which deduction is larger. Remember, your deduction can't exceed the gross income from the business use of your home.
In general, deducting the actual expenses will get you a larger write-off. This is especially so if you're living in an area with high mortgages or rent. Don't forget to keep track of all your house expenses to back up this deduction.
If you drive for your business, using the home office deduction can increase your mileage deduction. This is because it can cut out the IRS's commuting rule. The IRS says that personal commuting is not deductible. For example, you can't deduct the cost of driving from home to your regular outside office.
For professionals like Uber drivers, this can sting. The IRS commuting rule prevents you from writing off the cost of driving from home to pick up your first ride. This same rule applies to the drive home from your last ride.
That changes if you have a qualifying home office. Your home office qualifies as your principal place of business if:
You can increase your deductions for business trips with a qualifying home office. For example, you can deduct driving from home to an outside office. You can also deduct driving from home to pick-up a passenger if you're an Uber or Lyft driver.
You may deduct a portion or all of your internet expenses. You can only deduct it if you use the internet specifically for work purposes. Many of you likely use it for business and personal reasons, though.
If you use the actual expense method for your home office deduction, you can deduct the portion you use for work. If you use the internet at home 20 percent of the time for business, deduct 20 percent of your costs.