Home Office Tax Deduction for Small Businesses

The home office tax deduction is one of the most utilized write-offs by self-employed and small-business owners during tax season. It allows eligible taxpayers to deduct a part of your rent or mortgage payments due to business use. However, like all business expenses, the IRS puts limitations on how much you can claim or exactly who can claim home expenses. That's why it's important to know how to write off home office deductions correctly when filing your tax return. When done incorrectly, the consequences can be costly.

To help clarify this tax scenario, let's go over everything you need to know about when and how to deduct home office expenses. Here’s a brief rundown on the home office tax deduction for small businesses and self-employed.

Can a home office be tax deductible?

Sure! There are a number of small business owners who regularly work from home rather than drive miles away to a secondary office. Take real estate agents, for example. These sales professionals can take a business call or new listing at any time and place. And many times, it happens while working from home. But in order to qualify for the home office tax deduction, there are a few restrictions that the IRS imposes. Simply having a desk and computer in your house does not make you eligible for a home office deduction.  

So before you start making a list of possible home office expense deductions, familiarize yourself with the federal requirements you'll need to meet in order for them to apply. In general, there are two basic requirements for claiming the home office deduction:

1. There must be a designated space in your home that serves as your home office on a regular basis. For example, some taxpayers use a spare bedroom in which you conduct a significant portion of your work.
2. Qualified taxpayers need to show that your home office is where most administrative and management activities take place or inventory is stored.

You might immediately ask yourself: “Well, what percentage is enough?”. Although the IRS doesn’t specifically summarize the expected ratio of work conducted at home, a good rule of thumb is to perform over 50% of administrative and management tasks from your homebase. In other words, this specific area of your home should be your principal place of business. All things considered, a home office can only be tax deductible if you are self-employed and work a majority of the time from home. Otherwise, the IRS will find fault with taking this type of tax deduction.

What deductions can I claim for home office?

One of the great things about a home office write-off is that taxpayers can deduct the entire amount of a direct home office expense. Now that we’ve clarified who can deduct home office expenses, you might be wondering — “What can I actually deduct?”. Under the home office tax deduction, eligible taxpayers can write-off a portion of mortgage or rent payments, property taxes, utility costs, depreciation (if you own the home), relevant maintenance and repairs, and similar expenses. Keep in mind, you can't deduct the personal use of your home office. The more space that is devoted to your business at home, the greater your overall deduction will be worth.

How much can you write off for home office?

Rather than keeping track of every business expense, the home office deduction is relatively easy to comput. Similar to mileage deduction, there are two methods for calculating home office expenses:

Regular method

For the purpose of deducting home office expenses, you’ll need to calculate the amount of space that is used “exclusively and regularly” for business purposes. So let’s say your home office takes up 10% of your total square footage. You can then deduct 10% of pertinent home office expenses for the year.

Don’t feel like keeping track of your home office expenses? Here’s what else you can do.

Simplified option

The simplified option is a set amount established by the IRS that lets qualified taxpayers deduct $5 per square foot of space used as a home office. The maximum size for this deduction is 300 square feet. That being so, not all taxpayers benefit from the simplified option. Although we’ll admit, it’s certainly less arduous.  

The calculation method you choose is totally up to you. In order to get the largest home office deduction, you'll probably have to use both methods to determine which is best. However, most taxpayers opt to deduct actual expenses because it generally offers the greatest savings.

Can I claim the home office deduction if I work from home?

During the COVID-19 pandemic, the structure of the modern workplace changed dramatically as thousands of W-2 workers made the switch from office buildings to home offices. And though working from home certainly has its advantages, this change does not qualify you for a home office deduction. The tax reform bill removed the option for W-2 employees to claim miscellaneous itemized expenses, such as the home deduction or mileage deduction. The IRS only permits self-employed and small business owners to claim said expenses. In other words, your home office is not always deductible.

If you oversee a good portion of your daily tasks from home, there are several other tax deductions to consider when filing your taxes for the year. Other common expenses that self-employed and business owners write-off include:

• Mileage deduction
• Continuing education
• Insurance premiums
• Retirement savings
• Credit card and loan interest
• Phone and internet costs
• Advertising expenses
• Association and club memberships

To learn more about qualified tax deductions for small business owners and self-employed, visit the MileIQ Help Center to browse a free index of FAQs and resources.