If you’re one of the many people working from home this year, you may have questions about the home office tax deduction and whether you can qualify for it. Here’s a rundown of the rules.
Employees
Unfortunately, home office expenses incurred while working as an employee are not currently deductible. The reason: the Tax Cuts and Jobs Act temporarily suspended the itemized deduction for unreimbursed employee business expenses (and various other miscellaneous expenses). Unless lawmakers make a change, the deduction won’t become available again until 2026.
Self-Employed Individuals
The news is better if you are self-employed. You will be eligible for a home office deduction provided you can satisfy certain requirements. If you do, you can deduct all direct expenses and part of the indirect expenses involved in working from home. The deduction is generally limited to income from the business, and excess expenses may be carried over to the next year.
Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses include expenses such as rent, mortgage interest, real estate taxes, maintenance, and homeowners insurance. You can deduct only the business portion of your indirect expenses. These expenses are typically allocated between business and personal use based on square footage.
IRS Requirements
To qualify, a home office — a room or another separately identifiable space — generally has to be used regularly and exclusively for business purposes. The home office also must be (1) your principal place of business; (2) a place where you meet patients, clients, or customers; (3) a separate unattached structure that you use in connection with your business; or (4) a space within your residence that you regularly use to store inventory or product samples in connection with the business, if the residence is the only fixed location of your business (in this situation, the space doesn’t have to be used exclusively for storage).
You don’t necessarily have to spend most of your work hours in your home office for it to meet the principal place of business requirement. A home office can qualify if you use it for administrative or management activities and it is the only fixed location where you conduct those activities. Some examples of administrative or management activities include: billing customers, clients, or patients; keeping books and records; ordering supplies; setting up appointments; forwarding orders or writing reports.
Simplified Option
If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet. When the simplified method is used, qualified mortgage interest and property taxes are separately deductible as itemized deductions.
Your tax professional can help you determine whether you qualify for a deduction and what you may need to do to take advantage of it.