Many people whose jobs became remote during the COVID-19 pandemic are still working from home.
Some work entirely from home or on a hybrid schedule, others are searching for new jobs they can do remotely and some are starting their own businesses and doing self-employed work from home rather than returning to an employer’s office.
Only one of these groups can take the home office deduction.
Who Is Eligible for the Home Office Deduction?
Under current federal law, you can qualify for the home office deduction only if you’re self-employed. This wasn’t always the case, and these rules may not last forever. The law went into effect in 2018, eliminating the home office deduction for people who work for an employer. However, it’s scheduled to expire in 2026.
So, if you’re an employee, your home office expenses are not tax deductible — even if you do all of your work from home. “They can’t take the deduction,” says Morris Armstrong, an enrolled agent in Cheshire, Connecticut.
[Related:How to File Taxes When You’re Self-Employed]
Two home offices can look the same but have different tax statuses. Armstrong worked with a couple who both had offices in their home — one was working remotely for an employer and the other was self-employed. Only the spouse who was self-employed could take the home office deduction on their federal tax return.
You may be eligible for the home office deduction if you had any income from self-employment in 2023 — even if you weren’t a full-time business owner. But the rules are strict for that office to qualify.
Self-employed people can deduct home office expenses from their business incomes if their offices qualify. This includes people who work from home full time, those who have freelance side gigs (even though they may also work for employers) and those who were self-employed for a few months.
[Related:These 3 People Turned Their Side Gigs Into $100K+ Incomes]
For example, if you did some consulting for a few months while looking for a full-time job, you can take the home office deduction for the months during which you were self-employed and working from home. You must have some Schedule C income from self-employment to be eligible for the home office deduction.
Does Your Home Office Qualify for the Tax Break?
Your home office must meet certain standards to be eligible. To qualify for the home office deduction, you must use part of your home “regularly and exclusively” for business.
Your office doesn’t need to be in a separate room but it has to be in an area of your home where you don’t do anything else. It can be a dedicated nook in the corner of your basement, for example, but it can’t be the kitchen table where your family eats.
“There doesn’t have to be a wall that cordons it off — if you have an area that is designated as your home office and nothing else is done in that area, you have an exclusive area,” Trish Evenstad, an enrolled agent and the president of Evenstad Tax and Financial Services Inc. in Westby, Wisconsin, says.
“It may be just your desk and five feet around it in your basement. But if it’s your kitchen table and your family eats dinner there, too, you just lost the deduction,” she says. There are special rules for day care centers and inventory storage.
The space must also be your principal place of business or a place where you meet regularly with clients or patients. It doesn’t have to be the only place where you do work — it can be the place where you conduct administrative tasks for your business, for example.
“If you’re a plumber and you work in different places but your administrative work is always done in that home office, then that would qualify,” says April Walker, a certified public accountant and the American Institute of CPAs’ lead manager for tax practice and ethics.
[Read: How to File Taxes for Free.]
How Do You Calculate Your Home Office Deduction?
There are two options for taking the deduction. The simplified option is easier but may result in a smaller tax break. The standard option requires more complicated calculations and record-keeping but could give you a larger deduction.
Jean Wells, CPA and associate professor at the Howard University School of Business, says you should calculate your deduction using both methods to see which yields larger savings. You can change the method from year to year, she says.
The Standard Option
When you use this method you deduct your actual expenses. You can deduct 100% of some of your home office expenses, such as the cost to paint or make repairs to that specific area.
You can also deduct a portion of some overall housing expenses based on the area of your home you use as a home office.
For example, if your home office is one-tenth of the square footage of your house, you can deduct 10% of the cost of your mortgage interest or rent, utilities (electric, water and gas) and homeowners insurance. You can also deduct 10% of other whole-house expenses, such as cleaning and exterminator fees.
In addition, you can deduct a portion of your home’s property taxes and depreciation. Those calculations are complicated, but the instructions to IRS Form 8829can help. For a list of eligible expenses, see IRS Publication 587. Keep receipts of these expenses in your tax files.
The Simplified Option
There is also a simpler option: Instead of keeping records of all of your expenses, you can deduct $5 per square foot of your home office (up to 300 square feet) for a maximum deduction of $1,500. As long as your home office qualifies, you can take this tax break without having to keep records of specific expenses.
“I like the (simplified method) because you don’t have to keep as meticulous records and you don’t have to worry about depreciation recapture when you sell your house,” says Curt Sheldon, a certified financial planner and enrolled agent in Alexandria, Virginia.
How Do You Take the Deduction?
If you use the simplified method, you take the deduction directly on Schedule C by reporting your business income and expenses. If you choose the standard method, you must submit Form 8829 with your income tax return and report the total deduction from your business income on Schedule C.
Your deduction may be limited if your home office expenses are more than your business income for the year.
“The business use of home expense can not make the Schedule C income go below zero,” Evenstad says. “If there is unused business use of home expenses, it will carry over to the next year as long as the regular method is used. If the simplified method is used then the carryover is disallowed.”
If taxpayers switch from the regular method to the simplified method when filing 2023 taxes, they cannot deduct any disallowed amounts carried forward from prior years on Form 8829. However, they can continue to carry forward the disallowed amounts to the next year they resume using the regular method, Wells says.
What if You Were Self-Employed for Just a Few Months?
If you were self-employed for just a few months — for example, if you did some consulting while looking for full-time work — you may be able to take a partial home office deduction.
“If the taxpayer is self-employed for only part of the year, then they must use expenses only for the months that they were self-employed to calculate their home office expense deduction,” Wells says.
“For example, if the taxpayer did consulting work from their home office from August to December, then the home office expenses would be prorated for the five months that they worked from home,” she says.
If you use the simplified deduction of $5 per square foot (up to 300 feet), you can prorate the amount based on the number of months you worked from home.
For example, if you worked from home for five months and your home office was 300 square feet, you can take a $625 home office deduction, Wells says. (If your home office was 300 square feet or larger, you can deduct $125 for each month that you worked from home.)
You must be engaged in the business for at least 15 days in the calendar month to take the home office deduction for that month, Armstrong says.
Or, you can deduct a portion of your actual expenses — such as mortgage interest or rent, utilities and homeowners insurance (based on the percentage of your home’s square footage that you used as a home office) — for the months you worked from home.
Regardless of how long you worked in the home office, you must have used the space regularly and exclusively for business during that time.
Keep this requirement in mind if you’re setting up a temporary office in your home, even if you don’t plan to start your own business permanently: It doesn’t have to be a separate room but it has to be a space you use exclusively for your business.
What Other Home Office Expenses Are Tax Deductible?
If you’re self-employed — even if you’re just doing some freelance work — you may be able to deduct other expenses for setting up an office in your home. Furniture and equipment are deductible as business expenses on Schedule C, Wells says.
For example, the cost of buying a computer (based on the portion of time you used it for business), printer, modem, office desk and chair, file cabinets and even lighting for Zoom calls you make for your business can be tax deductible as a business expense on Schedule C. If you had a dedicated phone line or internet connection for the business you can deduct those expenses, too.
For more information about tax-deductible business expenses, see IRS Publication 535 Business Expenses.
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Can You Take the Home Office Deduction? originally appeared on usnews.com
Update 02/26/24: This story was published at an earlier date and has been updated with new information.
