As part of the gig economy, home businesses and remote work are becoming a bigger part of the US economy. More people are working at home, and deducting expenses for a home office can save you on taxes. Here are tax deduction tips for a home office.
Who qualifies for a home office deduction?
The IRS has two stringent rules to determine who qualifies:
- The designated space must be used regularly and exclusively to conduct business. This means the kitchen table won’t qualify. But an empty bedroom, a dedicated portion of a room or a separate structure on your property will qualify.
- The designated space must be your principal place of business. You can use other locations to run your business, but your home office needs to be where you conduct the most important activities of your business. If you have a separate workplace, but your home office is the main location where you perform administrative or managerial functions, this will also qualify.
What about employees who have a home office?
Prior to passage of the Tax Cuts and Jobs Act in December 2017, employees could also deduct home office expenses if they performed tasks at home for the convenience of the employer. Sadly, under the new law, deductions for all employee business expenses are suspended through 2025.
If this applies to you, consider asking your employer to set up an accountable plan so you can be reimbursed for your home office expenses. For remote workers, this may be your best option.
Can partners in a partnership deduct home office expenses?
If your partnership agreement requires you to pay for a home office, the expenses that you pay on behalf of the partnership can be deducted.
What about shareholders of an S-corporation?
Shareholders of an S-corporation are considered employees of their corporation. Like all other employees, deducting home office expenses as employee business expenses won’t be available again until 2026 under current tax law. Setting up an accountable plan is a win-win all around: your S-corporation gets the deduction, and you get a tax-free reimbursement for your documented expenses.
What expenses qualify?
- Direct expenses. Expenses exclusively for that part of your home, such as repairs, can be fully deducted.
- A percentage of all your expenses to maintain and own or rent your home. This includes mortgage interest, property taxes, homeowner’s insurance, utilities, general home repairs, the cost to rent your home, security systems, and cleaning services. The deductible percentage is based on the relative square footage of your home office compared to the entire home. Any portion of mortgage interest or property taxes that are deducted as a home office expense must be subtracted from your itemized deductions on Schedule A.
- You can deduct a percentage of the cost of your home. A percentage of the costs to renovate or remodel your whole home is also included. If you renovate or remodel your home office, all of those expenses can be either deducted or depreciated. However, if you sell your home later, you’ll have to recapture this depreciation as ordinary income.
These expenses are reported on Form 8829. The total deduction is limited to the related business income. This deduction then flows to Schedule C if you’re a sole proprietor.
Partners in a partnership deduct home office expenses directly on schedule E as unreimbursed partnership expenses (UPE).
What records do I need to keep?
You need to keep documentation of all the expenses you are deducting, which will include your utility bills and repairs.
Is there a simpler way to do this?
Yes! Since 2013, the IRS has allowed a simplified method. If you use this method, your deduction is a flat $5 per square foot of your home office, up to a maximum of 300 square feet for a deduction of up to $1500. With the simplified method, since there’s no deduction for depreciation, there’s no recapture of depreciation when you sell your home.
Will it trigger an audit?
Many small business owners fear that reporting expenses for a home office will trigger an IRS audit. But with so many small businesses out there, the IRS simply doesn’t have the resources to audit them all. And even if you do get audited, you needn’t worry if you do it right.
Deducting home office expenses is a great way to reduce your tax bill if you work out of your home. Contact us with questions about deducting home office expenses or if you need help with an accountable plan.