Updated: Dec 3, 2021
If you have a home office, then you have a potential tax deduction.
The Tax Cuts and Jobs Act made some changes to what the IRS wants to see when making this deduction.
Your home office must be “exclusively and regularly” available for your business or trade to qualify in 2019. That part of your house must also be the principal location of your freelancing efforts or company.
It could be a place where you meet with clients, work on specific job duties, and complete other business-related tasks. You can even have it be in a separate structure on your property.
The primary difference is that it must be your actual office and no just a place where you telecommute for someone else. You must be self-employed to qualify for the home office deductions.
How to Calculate the Home Office Deduction
The easiest way to calculate your home office expenses is to take the simplified option. This process allows you to claim a standardized deduction of $5 per square foot of home that you use for your working space.
There is a maximum of 300 square feet permitted when using the simplified option. That means the maximum deduction under the current tax legislation would be $1,500 if you choose to go this route.
Are your expenses are higher than what the simplified calculation permits? Then you can claim the exact percentage of home office costs directly related to the amount of space it takes up in your home.
If you have a 180-square-foot home office and your house is 1,800 square feet, then you would qualify for a 10% deduction of all home-related expenses that you paid during the year.
Is your home office 360 square feet in size in that 1,800-square-foot home? Then you qualify for a 20% deduction.
What Expenses Qualify for the Home Office Deduction?
Several home expenses qualify for the home office deduction qualification if you don’t take the simplified option. The most common figure involves the direct costs that went to maintain or repair this space in your home.
If you paint your home office, then the entire cost qualifies for a deduction.
Then there are some additional expenses where you can take the percentage of the cost that your home office absorbs.
Indirect expenses are the most common item for home office deduction.
Since your home office qualifies as a business property, you are eligible to take the percentage of space dedicated to your business as a business write-off. If your office takes up 10% of your home, then you can deduct that same percentage from your utility bills, homeowners’ insurance, security, general repairs, and HOA fees.
You can convert part of your mortgage interest and property taxes.
Your property taxes and mortgage interest are deductible costs if you qualify for your home office. It is an option that’s similar to the indirect expenses you get to take. As an added benefit, these costs reduce the amount of self-employment income you earn. That means you’ll see a reduction in what you owe for Social Security.
Renters can deduct their costs as well.
Do you rent the property where your home office is located? Then all you need to do is deduct the same percentage of your rent as the percentage of space that your business occupies. That means a 10% home office in a rental property at $1,700 per month would get to take a $170 x 12 expense.
You can depreciate the business portion of your home.
If you own your house, then the business part of your home office may qualify for depreciation.
You will want to be careful with this option since selling your property for a profit will trigger a capital gains tax on the total amount in depreciation that you took.
Other Points of Consideration with Your Home Office Deduction
There are limits to your write-offs. The IRS caps how much you can deduct for the business use of your home. Your deductions cannot exceed your home-based business income, which means it cannot shelter other income or create a tax loss.
The IRS has some exceptions to the exclusive-use test for the home office deduction as well. Providing daycare services for children, seniors, or individuals with disabilities have some unique rules to meet. If you store inventory or product samples, there are considerations for you to look at as well.
Taking the home office deduction is not generally an audit trigger. If you qualify as a self-employed worker, then you should take the simplified option or the standard calculation as part of your filing each year.