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IRS Home Office Tax Deduction – Rules & Calculator

By Kira Botkin

home officeIf you own a small business or do freelance work from home, you can get a nice self-employment tax break by using the home office deduction.

Simply put, the home office deduction allows you to deduct a portion of the cost of running your home as a business expense, proportional to the amount of your home you use for business. You can also take this deduction if you have been asked to work at home by your employer.

This can save you a lot of money if done properly – but you need to be careful, as it is one of the most commonly abused tax deductions.

Home Office Deduction

The IRS is fairly loose about what it defines as a “home”
Conduct business in an RV, houseboat, or missile silo? Or maybe a converted garage that you use as an office? That won’t make the IRS bat an eye. But they’re quite strict on the two requirements that define whether your home office qualifies for the tax deduction.

  1. You must use the area regularly and exclusively for a trade or business.
  2. You must be able to show that you use the area as your principal place of business, or meet clients or customers there.

What does it mean to use the area regularly and exclusively?
This means that your office computer isn’t the same computer your kids play games on. You can’t throw parties (unless they’re work-related) in your office, and you must use the space on a regular basis. Having a client conference in your spare room once a year doesn’t allow it to be qualified as a home office. However, you can also delineate one area of a room as your “office”, as long as it is separated  and isn’t used with the rest of the room. So if your desk is in the corner of a common area, you might put up screens or bookcases to show that it is a separated area.

What can you deduct using the home office deduction?
Any home-connected expense such as utilities, rent or mortgage, homeowners insurance, or necessary repairs can be counted. Home improvements that benefit the entire home can be deducted proportionally, but repairs that specifically benefit the office can be deducted in full. Keep in mind that even if you don’t qualify to take the home office deduction, home-connected expenses such as a telephone land line or cell phone plan that is used exclusively for business can still be deducted in full.

Simplified Option

As of tax year 2013, the IRS is offering a simplified option to claim the home business office deduction. Instead of filling out the lengthy Form 8829 and claiming individual expenses, taxpayers can fill out a new streamlined version in which the home office deduction is simply based on the number of square feet of office space. Home business owners can claim $5 per square foot for their office space up to 300 square feet.

Business owners who opt to use the simplified version cannot claim a depreciation deduction for their home or later recapture depreciation for the years they used the simplified option.

How to Calculate

First, determine what percentage of your home your office takes up, in terms of square footage. If your home is 1,000 square feet, and your office is 10 feet by 10 feet, your office is 100 square feet and thus encompasses 10% of your home. If you don’t know the square footage of your house, you should check with your local county auditor to see if they have the information on file for your property. Alternately, if all the rooms in your house are roughly the same size, you can divide the number of rooms you use for business by the total number of rooms in the home. However, calculating the square footage is likely to be more precise.

I’ll give you an example of how you might calculate a home office deduction. For our home office of 100 square feet in a 1,000 square foot house, we will use a deduction percentage of 10%.

Here are our expenses for the home for the year:

  • Mortgage:  $1000 per month x 12 months: $12,000
  • Electricity: $70 per month x 12 months: $840
  • Gas: $50 per month x 12 months: $600
  • Homeowners insurance: $100 per month x 12 months: $1,200
  • Furnace repair: $2,000
  • Property taxes: $2,000

Total: $18,640

The total expense of running the home for 12 months was $18,640. Since our home office was determined to be 10% of the home, we can deduct 10% of the total expense, which would be $1,864. Not bad!

Don’t forget that you can deduct in full any repairs made to the office specifically – so if we’d spent $200 painting the office, we can deduct that in full. That makes our total deduction $2,064.

Additional Deductions & Exceptions

Possible additional deductions
If you have space in your home that you use for the storage of business items, you can also deduct that square footage, even if you use the area for other things as well. For example, when I kept a large shelving system full of duck-related items in my living room (it’s a long story) I deducted the square footage that the shelves took up, even though the living room wasn’t a business-only area. Also, if you run a daycare from home, see Publication 587 (below) for special rules.

When can’t you take the deduction?
Some examples of when you cannot use a home office deduction:

  • You are renting the space in your home to your employer. (No double dipping!)
  • You are working at home for your own convenience (e.g. if you have an office but choose when you want to work at home).
  • The area is used both for business purposes and personal purposes.

The IRS has produced Publication 587, Business Use Of Your Home, which is the final word on the latest IRS rules for the home office deduction. You should check it each year to make sure that the guidelines and limits haven’t been changed. Additionally, you can find more detailed information about how to deduct expenses and whether you should use Schedule A if you are an employee.

Final Word

The home office deduction can save you a lot of money on your taxes! If you’re a small business owner looking to cut costs, now is the time to start pulling out those receipts, utility statements, mortgage statements, or cancelled rent checks to figure out how much you’ve spent on keeping your home and home office running.

Do you run a businesses out of your home? What other tax deductions do you take advantage of working from home?  Share your tips in the comments section below.

Also, be sure to check out the tax deductions for self employed small business owners and freelancers, tax deductible job search expenses, and tax deductible job relocation moving expenses.

Kira Botkin
Kira is a longtime blogger and serial entrepreneur who enjoys gardening, garage sales, and finding stray animals. She lives in Columbus, Ohio, where football is a distinct season, and by day runs a research study for people with multiple sclerosis. She hopes that the MoneyCrashers team can help you achieve your goals and live a great life.

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  • http://www.wellnessonless.com/ Stephanie Taylor Christensen

    Thanks for this article. This is the first year I am filing taxes as a home-based, self employed writer and have lots of uncertainties regarding the home office deduction. I do have one question regarding proving the viabiliy of the office. Does it make sense to take pictures of the office space for proof…or do you only need to get that detailed if the IRS comes knocking?

    • Kira Botkin

      It couldn’t hurt to take a picture of the office, especially considering the IRS generally takes a year or two to get back to you if they have questions for you – and your office might have changed size or you may have moved by then. So especially if the office is an odd configuration (ie, not just a room) taking a picture is a great idea.

  • Tyler

    I read in the publication that multiple trades or businesses are eligible for this deduction. In my case I have a full time employer and work from home (yes, I meet the requirements) and I have a self-employed consulting job on the side which is also conducted from home. The majority of my income originates from my full time work and I use one home office for both; the office is exclusive for business. How do I divide the deductions between the two businesses (even split, percentage of income, or other)?

  • Kira Botkin

    Honestly I don’t think it much matters because as long as your total between the two forms adds up to the amount from Form 8829, your taxes will be just the same. The most important thing is that you are using your office exclusively for business; for which business, the IRS is unlikely to care. I also have more than one line of business, but only one office, and this year I put the home office deduction on the one that didn’t lose money. =) So if you want to split the home office deduction between two Schedule C’s, you can do so by whatever method you think makes sense. If you want to split the deduction, it should be proportional – I wouldn’t do 50/50, but percentage of income would work, or time you spend on that business.

  • Tyler

    Thank you for the quick reply. My AGI from the primary employment is high enough that 2% of the AGI is higher than my calculated home office expense, so it doesn’t end up adding to my itemized deductions on Schedule A. Schedule C doesn’t have this 2% requirement so I would still be able to take advantage or some advantage of a deduction there. Sounds like I should probably go with percentage of income.

  • Kira Botkin

    OK, I think I did not understand the first time and thought you were filing 2 Schedule C forms, but it sounds like you will only have one Schedule C, for the consulting work. In that case, I would put all of your home office expenses that you can qualify on Form 8829 and put that on the one Schedule C that you do have. As long as these are expenses that you had to incur to have the office ready for business use for the consulting work, you can deduct them there even if you also then used the office for other business purposes. If you have other expenses that don’t qualify to be part of the home office deduction, such as paper, postage, etc that you use in the course of your main job, you could put those as unreimbursed employee expenses. The idea is that if you didn’t have your main job, you’d still have to pay that money towards the office expenses in order to maintain an office for your consulting work. I wouldn’t go bananas with the deduction, but if you only have one Schedule C, you can get more value out of your home office deduction by putting all the expenses on the Schedule C instead of on unreimbursed employee expenses.

  • Gale

    I have a home business with a sole and exclusive use office. I have always used the total square footage of my home divided by my office to get an approximate 10% business use. In addition to my home there is a separate garage apartment which is rented and I pay tax on the income derived from rent, as well as deduct specific expenses for that building. I was recently selected for an audit and the agent is insisting that to calculate my office percentage, I need to add the total home square footage to the garage apt square footage, and then divide my office space into that larger total. Obviously this results in a much smaller percentage for business use. This makes no sense to me since (1) it is a completely separate building and not part of my “home,” and (2) it is rented and I pay tax on all income derived from that building. I have searched high and low for more specific guidelines for calculating square footage, but can’t find anything that addresses adding square footages together from multiple buildings on the same property. I can accept that if it is indeed an accurate determination, but right now I’m feeling pretty ripped off.

  • Guest

    I used to be self employed and declared a room of my house as a home office. This is my first year as a fully salaried person but I still have some carry over self employed income. I don’t plan on using the home office deduction anymore. Can I just stop or do I need to report something for ending the deduction?

    • Kira Botkin

      You do not need to do anything to stop taking the deduction, but if you used your home office for even part of the year last year, you can take a deduction for the expenses from the time that you were still self employed. Also, you will want to check with an accountant when you sell your home as there may be some issues to take care of there from the home office deduction.

  • Katmercer

    My home office moved over 100 away and now I work from home two days a week because of the relocation, can I deduct my home office due to these circumstances?

    • Kira Botkin

      I assume that you meant to write 100 miles – if your boss ASKED you to work from home, yes you can deduct it. If you are working from home because it is more convenient for YOU and your boss is merely permitting it, then no, you can’t.

  • J Sean

    I work for an online university and was asked if I could work from home last year. I have been working from home in a spare room in my apartment which is about 15% of the total of my apartment. Would I qualify for the home office for next years taxes?

    • Kira Botkin

      Yes, that sounds like it would qualify. If you worked from home in 2011, you could put that on your taxes for 2011 (the ones that are due right now) and make sure to figure out what proportion of the year you were using your home office in order to calculate accurately.

      • J Sean

        Thank you. I already did the current taxes so I will be putting in for next year. One question, would you reccommend I seek out someone to prepare my taxes for me since I am doing this or could I still do them myself? In other words, is this an overly hard thing to do?

        • Kira Botkin

          You can still file an amended tax return for 2011 if adding in that deduction would get you a worthwhile amount of money. It’s not particularly difficult, you just need to keep track of how much you pay in rent, utilities, etc over the year. The one-up-from-free version of most tax programs will handle it perfectly well.

  • Rewest1373

    I did child care the entire year from my home for one toddler – she was here four days a week from 6:30am-4:00pm. This business is also entitled to the tax deductions – correct?

    • Kira Botkin

      Daycare is subject to a separate set of rules, which are listed in Publication 573 that’s linked above, but you have to be licensed in order to take the tax deduction for business use of the home. Also, the calculation is based both on the square footage used and the hours it was used. But if you meet those rules you can take the deduction.

  • http://www.facebook.com/people/Justin-James/1415104594 Justin James

    I didn’t see anything about how you can only deduct the portion that exceeds 2% of your AGI. Am I missing something?

    Edit: I believe that 2% only counts for employees not the self employed.

    • Kira Botkin

      Yes, that is correct. If you are an employee working at home for the convenience of your employer, some of your home office expense is considered an unreimbursed employee expense which is deducted on schedule A and is subject to the 2% of AGI limit. However the part of your home office expense that is due to mortgage interest or real estate taxes doesn’t fall under there, it goes where it would normally go on schedule A. Fortunately if you are self employed none of this matters and it all goes directly off the top on schedule C.

  • Ellen Walker

    I was an independent contractor (received a 1099 Misc) for a tutoring business and conducted the tutoring out of my home so I was taking the business use of your home deduction for the “classroom” in previous years. Then I purchased the tutoring business from the person running it (who was a sole proprietor) in September of last year. Do I need to split the business use of the home deduction between the two business schedule C’s for the part of the year I was operating each one? Do I even need to file two separate schedule C’s, treating each as a separate business since the trade was the same for both businesses and the place I was conducting the business was the same?

    • Kira Botkin

      I don’t think you need to file separate schedule C forms, just make some notes for yourself to keep with your tax documents as to when you bought the business and what time period the 1099-MISC you got from the old owner covers. You would only fill out one home office deduction form.

  • rafridi

    My husband has a taxi business. Do u think we can use this deduction also?

    • Kira Botkin

      If he does administrative work in a home office, yes, that could count.

  • B. V.

    I am retired and am now working on writing a book to be published as an e-book/i-book. Living in a small apartment with another person, I purchased a tiny 22 foot RV that I am using for writing. I use it parked as an office and, at times, hit the road and use the experiences for the writing content.
    So! What can I use as a deduction?
    Purchase price?
    Parking fees?
    Insurance?
    Gas and traveling expenses?
    Anything?

    Thanks!

    • Kira Botkin

      You could theoretically deduct some of the monthly cost of running the RV as an expense, but to be honest this is really a dicey proposition, since you don’t really have a business (since you have not actually published anything) and traveling to generate content is not a necessary business expense (since you could generate content at home.) I wouldn’t push it.

  • elo

    I am a salaried full time employee of a non-profit with a second floor office provided by them. I was injured in the parking lot and was unable to walk and use the stairs for 4 months. Workman’s comp paid my medical bills. My employer continued to pay me with the understanding that I would do my work from home. They continued to pay the rent on my office which I returned to after I was healed. Can I deduct any home office expenses for my time at home? I used my personal computer and phone.

    • Kira Botkin

      This seems to fall under “You are working at home for your own convenience” which is a situation in which you cannot deduct your expenses, since you had a place to work, albeit in a second floor office. Also, I would highly doubt that you used your personal computer and phone for business purposes only, which would be necessary for them to qualify as a deduction.

    • Nolan

      I disagree with Ms. Botkin. I think the medical necessity of working from home allows you to take the deduction for part of your home. They continued paying you with a work-at-home agreement which clearly documents that the company expected that the work be done IN YOUR RESIDENCE. I assume that this was due to the fact that you would have been less productive than working in the office due to your short-term disability–either due to inaccessibility (stairs) or some other medical reason. I think that you can also deduct a portion of your computer and phone expenses, including all long distance business calls that you document.

      This advice is my opinion only and does not constitute tax or legal advice. I am not a lawyer, but I do have an accounting degree and worked at home for over a year with a work-at-home agreement I had with a former employer. I was provided a PC in my manager’s office (in another city that I could access remotely) and a laptop for use in my home office.

      • Kira Botkin

        It doesn’t seem worth risking an audit to get to deduct a portion of your internet bills. Your situation was very different.

  • I know what I am talking about

    I think you should learn the actual rules before posting this, your calculation for the deduction is incorrect.

  • Mel B

    I’m a nail tech employed by a company but I also hold a business license to do independent contractor work at another location for another company. I live in an RV full time but I conduct some of my independent work from my home, publishing blog articles. I have the dinner table space specifically for my nail work, nothing else gets set on it. I also use my pc for work related blogging in the RV. Am I able to deduct anything when I work from home? It’s pretty much impossible to block the table area off unless I got a room divider. Would that work?

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