If you own a small business and “exclusively and regularly” use part of your home as your primary place of doing business, you may be able to deduct some of the expenses of operating your home office on your federal income tax return. Unfortunately, employees are not eligible to claim the home office deduction to the disappointment of many of us who have worked from home due to the pandemic.
What does “Home” Mean for Purposes of this Deduction?
For those who can take the deduction, “home” includes a house, apartment, condominium, mobile home, boat, or similar property. It also includes separate structures on the property such as an unattached studio, workshop, garage, or barn. Home doesn’t include any part of your property used exclusively as a hotel, motel, inn, or similar business.
How Do I Qualify?
In general, there are three basic requirements for a home office to qualify for the deduction. First, you must be a business owner with your home being your principal place of business. There can be more than one business location, but the home must be the main place the trade or business is conducted. The relative importance of activities performed at each place must be considered along with the amount of time spent at each place. For example, if only administrative or management activities are conducted at home and there is no other location to perform these duties, you can qualify for the deduction even if some business is conducted outside the home.
Second, a separately identifiable space in your home must used exclusively for conducting business (permanent partitions not required). For example, a business owner who uses an extra room in the house to run his or her business can take a home office deduction for the extra room as long as it is used exclusively for the business. A home office set up on the dining room table doesn’t constitute exclusive use since the dining room is also used for nonbusiness activities. Slightly different rules apply for individuals who run daycare facilities.
Finally, the business use must be regular, not incidental or occasional. The IRS says that in determining regular use, you should consider all pertinent facts and circumstances. In other words, you have some latitude in defining what regular use is, as long as you are reasonable about it.
What Expenses Can I Deduct?
Expenses that can be deducted include but are not limited to mortgage interest, real estate taxes, insurance, utilities, repairs, maintenance, depreciation, utilities, and rent. Expenses for keeping up and running your entire home are deductible based on the percentage of your home used for business. Expenses made directly for the home office space itself are deductible in full.
How Do I Calculate the Deduction?
If you qualify for the deduction, you may choose one of two methods to calculate the home office expense deduction.
The simplified option allows you to deduct a flat $5 per square foot of your home office space. The maximum deduction under this method is $1,500.
The regular method requires the taxpayer to determine the ratio of the square footage of the home office space to the square footage of the entire home. The deduction is based on the percentage of the home devoted to business use. For example, if your home office is 300 square feet and your home is 2,000 square feet, you can deduct 15 percent of mortgage interest, property tax, utilities, and other permitted expenses on your tax return. Again, direct expenses are deductible in full.
If you want to discuss the “facts and circumstances” of your home office deduction, please visit with one of R&A’s outstanding tax professionals. We can help you navigate the multitude of home office rules and definitions so you can feel confident in deducting home office expenses on your 2021 tax return.
About this Author
Susan is experienced in tax research, not-for-profit taxation, trusts and estates, and sales tax. She has prepared tax returns for pubic charities, private foundations, and charitable trusts as well as unrelated business income tax returns for numerous charities.