Business Use of Home

The home office expense deduction allows you to claim certain costs associated with maintaining a dedicated space in your home for work. Here’s an overview of the rules and eligibility criteria:

Eligibility Criteria

  1. Exclusive Use: The space must be used exclusively and regularly for your business or work purposes. It cannot double as a personal space (e.g., your living room or shared bedroom).
  2. Principal Place of Business: The home office must be your principal place of business, or a place where you meet clients or customers in the normal course of business
  3. For Employees (if applicable):
    • Starting with the 2018 tax year, employees cannot claim this deduction on their federal tax return due to changes in the tax law unless you’re self-employed. (State rules may vary.)

Two Calculation Methods

1. Simplified Method:

  • Deduct $5 per square foot of your home used for business, up to a maximum of 300 square feet ($1,500)
  • No need to calculate or allocate individual expenses like utilities or repairs.

2. Actual Expense Method:

  • Deduct a portion of your home’s actual expenses, such as:
    • Mortgage interest or rent
    • Property taxes
    • Utilities (electricity, water, gas, etc.)
    • Homeowners insurance
    • Repairs and maintenance
    • Depreciation (for homeowners)
  • The deductible percentage is based on the ratio of the home office area to the total square footage of your home.

Recordkeeping Requirements

  • Keep detailed records of expenses related to the home office, such as utility bills, property tax statements, and receipts for repairs or upgrades.
  • Document the size of the office space and the total square footage of your home.

Reporting Home Office Expenses

  • For self-employed individuals: Use Form 8829 (Expenses for Business Use of Your Home) to calculate the deduction and report it on Schedule C.
  • For employees or other specific cases: Confirm with your tax advisor whether local or state laws allow for any deductions.

Scenario

  • You are a self-employed graphic designer.
  • Your total home square footage: 1,500 square feet.
  • Home office space: 300 square feet (dedicated exclusively for work).
  • Total home expenses for the year:
    • Rent: $18,000
    • Utilities: $3,600
    • Internet: $1,200
    • Repairs (general): $600
    • Total Expenses: $23,400

Form 8829: Expenses for Business Use of Your Home

Part I: Calculation of Business Use Percentage

  • Total office space: 300 sq ft
  • Total home space: 1,500 sq ft
  • Business use percentage: 300 ÷ 1,500 = 20%

Part II: Direct and Indirect Expenses

  • Direct expenses (specific to the office): e.g., office-only repairs.
  • Indirect expenses (shared for the entire home): Rent, utilities, etc.
Expense TypeTotal CostBusiness Use (20%)
Utilities$3,600$720
Internet$1,200$240
Repairs$600$120
Total$23,400
$4,680

Using the Simplified Method

If you choose the simplified method:

  • Home office space: 300 sq ft
  • Rate: $5 per sq ft
  • Deduction: 300 × $5 = $1,500

Key Notes

  1. The simplified method is easier but may result in a lower deduction if your actual expenses are high.
  2. Always keep records to support your deduction in case of an audit.
  3. Ensure your home office meets the eligibility requirements (e.g., exclusive use for business).