There are many perks of working from home, including the tax deduction available to many taxpayers who have a home office. However, the Tax Cuts and Jobs Act (TCJA) has effectively eliminated the long-standing home office deduction through 2025. But if you are self-employed, there are still some deductions you may be able to take — even if you don’t itemize deductions on your tax returns.
Here are some of the most common questions we get in terms of home office deductions.
Under current tax, you must use at least part of your home “regularly and exclusively” for either:
- Your principal place of business, or
- A place to meet or deal with customers, clients or patients in the normal course of business.
The phrase “regularly and exclusively” means you consistently use a specific identifiable area in your home for business (incidental or occasional personal use likely won’t disqualify you).
Another potential challenge to qualifying for this deduction is the rule that the home office must be your “principal place of business.” The IRS may challenge deductions if you work from multiple locations and try to claim your home office as your main workplace.
However, your home office will qualify as your principal place of business if it’s used regularly and exclusively for administrative or management activities, so long as you don’t have any other fixed location for conducting these activities. For example, this opens the door to deductions for physicians who work at several hospitals.
Note: If you use a separate structure — like a barn, garage or shed — to store products or tools used in your business, you may be able to deduct that space, provided it’s used just for your business.
How Did the TCJA Affect Deductions?
Prior to the passing of the TCJA, employees could deduct unreimbursed home office expenses as employee business expenses, subject to a floor of 2% of adjusted gross income (AGI) for all your miscellaneous expenses. To qualify, a home office had to be used for the “convenience” of your employer, a stipulation often written into an employment contract.
For example, if you had an AGI of $100,000, the 2%-of-AGI threshold was $2,000 ($100,000 × 2%). So, if you had $5,000 in annual miscellaneous expenses, including home office expenses required by your employer by contract, you could deduct $3,000 ($5,000 – $2,000).
But unfortunately, the TCJA eliminated that deduction through 2025. So unless Congress adjusts it in the coming years, employees won’t see this tax break for quite some time. However, there are deductions available to self-employed taxpayers.
What Expenses Are Deductible?
Self-employed people often have a home office. If you qualify, you can write off the full amount of your “direct expenses” and a proportionate amount of your “indirect expenses” based on business use.
Some examples of direct expenses are having the office painted, repaired or cleaned. Indirect expenses include:
- Mortgage interest
- Property taxes
- Telephone cost of a separate business line
- Utilities (such as electric, gas and water)
- Repairs and maintenance of outside of home
- Home security system fees
- Depreciation (based on special IRS tables)
For example, suppose you incur $2,000 in direct home office expenses and $10,000 in indirect expenses in 2019. You have a 3,000-square-foot home and use a 300-square-foot room as your office, so the applicable business percentage of the home is 10% (300 ÷ 3,000). You can claim a $1,000 deduction for those expenses ($10,000 × 10%). Accordingly, your total deduction is $3,000 ($2,000 of direct expenses and $1,000 of indirect expenses).
Important: You can’t double up on deductions for mortgage interest and property taxes. If you claim a home office deduction, you must reduce the amount of itemized deductions you take for these items.
How Can You Get a Bigger Deduction?
You can maximize your home office deduction on your 2019 return with a couple of astute tax choices.
Consider using the traditional method, not the simplified method
Before 2014, home office deductions were based on a combination of direct and indirect expenses, which required detailed record keeping. Now, under current tax law, the IRS simply allows you to make a deduction based on the square footage of your home office space (up to a maximum of $1,500).
But while the new deduction method may be easier to calculate, it won’t always produce a bigger deduction. So, if you have the necessary records, you might want to opt for the traditional method, because it could produce a bigger deduction.
Let’s use the example from above about using 10% of a 3,000-square-foot home as an office. With the traditional method, you could deduct $3,000 in home office expenses, comprising $2,000 of direct expenses and $1,000 of indirect expenses. Using the new method, your deduction is limited to only $1,500 — half of what you could deduct using the traditional method.
Evaluate the difference between the square footage method and the rooms method
Generally, the method for determining a home office deduction is based on the square footage of the office divided by the total square footage of the home. A 300-square-foot office in a 3,000-square-foot home results in a 10% business-use percentage.
However, the IRS says you can use any reasonable method for determining the business-use percentage. It has previously allowed deductions based on the number of rooms. For example, say that the home office in our example is one out of eight rooms in the home. In that case, basing the deduction on the number of rooms would result in a business-use percentage of 12.5%.
Important: You may have to recapture some of the tax benefits of claiming depreciation for a home office if you subsequently sell the home.
We get many questions from people in Maine about the rules for deducting home office expenses, especially in light of the recent tax law changes. If you have a home office and want to maximize your deduction, contact us here at Filler & Associates.