Are You Eligible for the IRS Home Office Deduction?

Updated February 2, 2024
12 min read
Are You Eligible for the IRS Home Office Deduction?

A monumental shift has occurred in response to the COVID-19 pandemic, with businesses and employees transitioning to the work-from-home model. This change has sparked debates about possible tax breaks. Specifically, the IRS simplified home office deduction. If you're self-employed and operate out of your home, you may qualify for this deduction, reducing your federal income tax liability.

However, eligibility for the IRS home office deduction is not guaranteed because you work from home. The deduction has rigid specifications by the Internal Revenue Service (IRS), which claimants must adhere to strictly. This article aims to give you a comprehensive understanding of these IRS guidelines for home office deductions.

Who Is Qualified for the IRS Home Office Tax Deduction?

It's important to emphasize that only some home offices qualify for the IRS's tax deduction. Your work-from-home scenario must meet several criteria.

  • You must use your home office regularly and exclusively for your business. This means a part of your house, apartment, condo, or other similar structures must be dedicated to facilitating your business activities continually. However, properties such as hotels, inns, motels, or similar establishments exclusively used for business do not qualify.

  • Your home must serve as the principal place of your business. Although your home need not be the only place you interact with customers or clients, it should be the primary location where your administrative or managerial activities like record keeping, appointment setting, and billing occur.

Furthermore, space used for personal and professional tasks must meet the qualifications. Maintaining a strict boundary between your personal and work space is integral for productivity and essential to meet the IRS criteria for home office deductions.

Who Is Exempt from Home Office Deductions?

Before establishing the Tax Cuts and Jobs Act (TCJA), the rules governing IRS home office deductions applied to all remote workers, whether employees or self-employed individuals. However, if you are an employee working from home, you're exempted from this benefit effective January 1, 2018, through December 31, 2025.

Similarly, you can only access these deductions if you're self-employed and use a portion of your home for business but must meet the IRS requirements.

How Do IRS Home Office Expenses Work?

Under the IRS home office rules, deductible home office expenses include costs allocated for equipment, maintenance, furniture, and supplies, among others. You can also deduct a calculated portion of your home-related expenses. To achieve this, you must compare the size of your home office with your home's overall space. These expenses are recognized as legitimate costs of running your business.

Importantly, these deductions are proportionate to the portion of your home used for business purposes. For instance, if your home office accounts for 15% of your home's total area, you could claim up to 15% of qualifying home expenses, including part of your lease agreement expenses, as business deductions.

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How To Calculate Your Home Office Tax Deduction

If you're one of the many people who transitioned to teleworking and are exploring IRS work-from-home deductions, understanding how to calculate your home office tax deduction is crucial. The deduction can be determined using either a simplified or regular method. Implementing the simplified method means you're not directly deducting expenses but leveraging preset IRS rates. Here, your home office's square footage is multiplied by a rate of $5 per sqft.

Although more complex, the regular method offers more precision by measuring the actual expenditure against the total residential expenses. This method allows deductions for mortgage interest, taxes, home insurance, utilities, repairs, and other costs.

There are two options when using the regular method:

The standard option

Determines your home office deduction based on actual home office expenses against residential total expenditures. IRS Form 8829 is used to calculate this deduction. This form is divided into four parts, each designated for computing the different aspects of your deduction, including home business income, home office space size, and property depreciation. This option requires meticulous tracking of all expenses — even those seemingly personal, like utility bills and equipment purchases.

The simplified option

The simplified option for home office deduction offers a less complicated method for calculation. It prescribes a flat rate of $5 per square foot up to 300 square feet of space, promising a maximum deduction of $1,500. This implies that you enjoy tax breaks if your office does not exceed 300 square feet. The benefit of the simplified option is you no longer have to record individual expenses.

Claiming Your Deduction

For business owners using the simplified method, income, and expenses can be reported directly on Schedule C form. In instances of multiple owners in a partnership, each partner declares their share of income or losses on the same Schedule C form. However, all the partners may be liable to pay self-employment tax.

For businesses opting for the standard method, Form 8829 must be filled and submitted with their income tax return. Key business deduction components must be clearly stated on their Schedule C form before the IRS can recognize their home office deduction.

How are Deductions Handled for Part-time Self-Employment?

Individuals working episodically, seasonally, or contractually can also benefit from home office deductions for the duration they were actively self-employed. Even intermittent expenses such as rent and utilities can be prorated based on the active business months.

This flexibility in the IRS rules acknowledges today's diverse working patterns, particularly in the gig economy. For instance, a freelance graphic designer working intensively on a project for a few months can avail of the home office deduction proportionate to that period. Thus, freelancers and contract workers should be able to harness this benefit to offset their expenses and potentially enhance their net earnings.

Critical Requirements for Home Office Deduction

Navigating the rules and requirements for IRS home office deductions can be complex, but understanding the fundamental qualifying criteria can simplify this task. Here are the essential qualifications for the IRS home office deduction:

  1. Exclusivity of the workspace: The workspace in your home must be exclusively utilized for work. Using the area for residential and business purposes will not meet the IRS requirements.

  2. Minimum business activity: To be eligible for the home office tax deduction, the business must be active for at least 15 days within the month.

  3. Distinct separation from certain property types: If your workspace is within properties like hotels, inns, motels, or similar establishments used for business, these do not qualify for the home office deduction.

  4. Principal place of business: Your home should serve as the principal place of your business; it's where primary administrative and managerial activities should take place.

Adhering to these criteria while setting up your home office will put you in a better position when tax season comes, potentially resulting in significant savings on your tax invoice.

Determining Your Home Office Tax Deduction

One of the simplest methods to determine your home office square footage is to measure it against the total area in your home. If the rooms in your home are the same size, you can categorize the number of rooms you use for business by the total amount of rooms in the house. For instance, if your home office is a 200-square-foot space, your home office tax deduction would be 200 x $5, totaling $1000.

Remember, correctly determining the proportion of your home used for business purposes will be crucial in accurately calculating your deduction. Also, it's vital to maintain records of these measurements in case of an IRS audit. In this example, a home office occupying 200 square feet qualifies for a tax deduction of $1,000, demonstrating how these deductions can be quite significant when adequately utilized.

Conclusion

To benefit from IRS home office deductions, you must adhere strictly to IRS guidelines. Understanding what qualifies for tax deductions and applying them correctly will play a significant role in securing home office tax deductions. You should contact a qualified tax lawyer to help you with all legal issues. From office furniture to other stationery, anything that contributes to the successful running of your business can count for tax deductions. The $5 flat rate for the simplified option became effective in 2022, but the IRS may review it periodically and communicate changes to the public.

Article by
Yevheniia Savchenko
Lawrina

Yevheniia Savchenko is a Product Content Manager at Lawrina. Yevheniia creates user interface copies for Lawrina products, writes release notes, and helps customers get the best user experience from all Lawrina products. Also, Yevheniia is in charge of creating helpful content on legal template pages (Lawrina Templates) and up-to-date information on US law (Lawrina Guides). In her spare time, Yevheniia takes up swimming, travels, and goes for a walk in her home city.

If you have any questions or suggestions regarding the product or UX content for Lawrina, feel free to contact Yevheniia directly at y.savchenko@lawrina.org or connect with her on LinkedIn.