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