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The home office deduction can be a valuable tax break for self-employed taxpayers who qualify for it.
The deduction allows you to reduce your taxable income based on certain expenses related to using part of your home for business.
You can calculate your home office deduction in one of two ways. If you choose the more complex way (which has some advantages over the simpler method), you’ll need to complete and file Form 8829 with your federal income tax return.
Let’s look at the rules for claiming the home office deduction and when and how to complete Form 8829.
The home office deduction allows a qualifying self-employed person who uses part of their home for business to lower their taxable income by deducting certain expenses related to the business use of their home. Lowering taxable income could, in turn, reduce a taxpayer’s federal income tax obligation.
The deduction isn’t limited to homeowners — it’s also available to renters, whether they live in a house, apartment, condo or another type of home. But not every self-employed person who works from home qualifies for the deduction. Here’s what you need to do to be eligible for the deduction.
- Use your home office exclusively and regularly for business. Your home office doesn’t have to be a separate room in the house, but the space you claim must be used solely for work. In other words, a freelance writer who works from their kitchen table probably can’t take a deduction for that room. But if they have a desk in a room that they don’t use for any other purpose but business, that might qualify.
- Use your home office as your principal place of business. That means you use your home to conduct a substantial portion of your work. Your home office doesn’t need to be the only place you do business, but it should be a place that you regularly and substantially use in the ordinary course of business. And if you have a separate structure, like a studio or garage, that you use exclusively for business, you may still be able to deduct expenses for it, even if it’s not your principal place of business.
There’s one final caveat when it comes to claiming the home office deduction: Before the Tax Cuts and Jobs Act of 2017, or TCJA, the home office deduction was available to both self-employed people and employees who had a home office for the convenience of their employers. But starting with the 2018 tax year, the TCJA made it impossible for employees to claim the home office deduction because it suspended certain miscellaneous deductions, including unreimbursed employee business expenses. For the 2018 through 2025 tax years, taxpayers who are employed by someone else are out of luck (unless Congress changes the current tax rules).Learn about tax forms for self-employed people
If you qualify for the home office deduction, you might need to complete Form 8829 to take advantage of the tax break. But there are two ways to calculate the home office deduction, and only one of them requires filing Form 8829.
You can use whichever method results in a lower tax bill and even switch back and forth between the two methods from year to year.
- The simplified option
With this method of calculating the home office deduction …
- Eligible taxpayers can get a deduction of $5 per square foot of the home used for business — up to a maximum of 300 square feet. For example, if you have a 200-square-foot home office, your deduction would be $1,000 (200 x $5).
- You don’t need to file Form 8829. Instead, you simply report the square footage of your home and applicable deduction, based on the percentage used for business purposes, on Line 30 of Schedule C.
But using the simplified method also has some drawbacks.
- You can’t deduct depreciation of your home for the portion you use for business.
- As with the regular method, your deduction can’t exceed the gross income you derived from the business use of your home, less business expenses. And if it does, you can’t carry any excess deduction over to claim it in the next tax year. The regular method allows for carrying over the deduction for eligible filers.
- The regular method
With the regular method of calculating the home office deduction, your deduction can’t exceed your gross income derived from your business — same as with the simplified option. But if your deduction exceeds that limitation, you may be able to carry it over and claim it in the next tax year.
The catch is that the regular method is more work than the simplified. It involves adding up the actual expenses of maintaining your home for the year and multiplying the total by the percentage of your home’s total square footage that is used for business.
For example, let’s say you have a 2,000-square-foot home, use 200 square feet for your home office, and have the following home expenses for 2019:
Deductible mortgage interest
Real estate taxes
Total home expenses
Since you use 10% of your home (2,000 total square feet / 200 home office square feet), your home office deduction using the regular method would be $800 ($8,000 x .10).
The expenses used in the example above are considered “indirect expenses” of your home office, meaning they apply to your entire home. But if you use the regular method to calculate your home office deduction, you can also deduct direct expenses. These are costs that stem directly from the home office, such as repairing the drywall in your home office or having the room painted.
Using the regular method means you’ll have to maintain records of your expenses. But choosing this approach could mean you’re able to deduct more for the business use of your home, including depreciation. And, again, you can carry forward deduction amounts that exceed gross income limitations.
If you choose to calculate your home office deduction using the regular method, you’ll need to complete Form 8829 and attach it, along with Schedule C, to your Form 1040 federal income tax return.
At first glance, Form 8829 may look daunting, but it’s not that difficult to complete. Here’s a look at the information you need to complete each section.
This section is used to calculate the percentage of your home used for business. Here’s what you’ll need for Part I.
- The square footage of your entire home
- The square footage used for business
If you run a home-based daycare business, there are a few extra lines to complete. You may need to use a special method to calculate your deduction, too. Check out the IRS Instructions for Form 8829 if you want more information on completing this form for a daycare.
This section is used to add up your home business expenses (like home office costs) and multiply your indirect expenses by the percentage calculated in Part I.
Direct expenses of maintaining your home office apply only to the portion of your home that you use for business. For example, if you painted or replaced a broken window in your home office, those would be direct expenses.
Indirect expenses apply to the upkeep and operation of your entire home, like the cost of homeowners insurance, utilities and general repairs.
What business expenses are tax deductible?
Generally, an expense must be both ordinary (common and accepted in your trade or business) and necessary (helpful and appropriate for your trade or business) to be considered tax deductible. That means many different types of business expenses could be deductible. For example, if you use your car for business or rent equipment to use in your business, those costs could be deductible.
This section is used to claim depreciation on your home office. Here’s what you need for Part III.
- Your home’s adjusted basis (what you paid for it, plus the cost of improvements) or fair market value on the date you first started using the home for business, whichever is less.
- The portion of your home’s basis or fair market value allocated to land.
Use this section only if your home office deduction is greater than your net income from the business. Part IV is used to calculate any unused expenses that can be carried forward and deducted on next year’s return.
If you’re self-employed and work from home, don’t let the idea of filling out Form 8829 scare you away from taking advantage of the home office deduction. You can always opt for the simplified method if you don’t want to deal with tracking your actual expenses. And if you prefer to base your deduction on actual expenses, Credit Karma Tax® can help you complete Form 8829, based on information you provide when you use the free, online tax preparation and filing services to file your federal income tax return.
Relevant sources: IRS Form 8829, Expenses for Business Use of Your Home (2019) |IRS: Simplified Option for Home Office Deduction | IRS: Credits and Deductions for Individuals | IRS Publication 587, Business Use of Your Home (2019) | IRS: Home Office Deduction | IRS: Tax reform affects if and how taxpayers itemize their deductions | The Tax Cuts and Jobs Act of 2017 Conference Report | IRS Schedule C: Profit or Loss From Business | IRS: Deducting Business Expenses
Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is an Enrolled Agent and the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.