If you are self-employed and run a business from your home, you are likely eligible to claim a deduction for expenses related to the business use of your home.
Am I eligible for a home office deduction?
To claim a home office deduction, your home office must meet the following two requirements set forth by the IRS:
- You must regularly use a part of your home exclusively for business. Your home office space doesn't need to be closed off or a separate room, but it does need to be a spot that is used only for your business and nothing else. For example, if you use a corner of your playroom for a home office, only the space that holds your office is deductible, not the entire room- and if your kids do homework and artwork at the desk, you forfeit the deduction.
- Your home must be the principal location from which you conduct business. Your home office doesn't have to be the only place that you work, but your business must be substantially conducted there. If you regularly meet clients there or perform all your administrative work there, your office would meet this requirement, even if you also sometimes work elsewhere.
The home office deduction applies to renters and homeowners in any type of home as long as it meets the eligibility requirements. Employees working from home for an employer are not typically eligible for a home office deduction. If you work for an employer but also run your own business or freelance on the side, you can still claim the deduction even if you spend more time at your employer's office.
If you use a separate freestanding structure for your business, such as a garage or studio, you would be eligible for the deduction if it is used exclusively for business, even if it is not the principal place of business.
How do I calculate my home office deduction?
You can calculate your home office deduction using one of the following two methods:
- The simplified method allows a standard deduction amount per square foot of home office.
- The standard method applies the percentage of home office space to actual home expenses.
Regardless of which method you choose, the eligibility requirements discussed above remain the same.
The simplified method allows you to multiply the square footage of your home office space by a set dollar amount provided by the IRS. For 2023, the prescribed rate is $5 per square foot with a maximum of 300 square feet.
The standard method allows you to apply the percentage of your home that you use for your office against certain qualified expenses, such as:
- Mortgage interest
- Homeowner's or renter's insurance
- Repairs and maintenance
For example, if your home office occupies 200 square feet in a 2,500-square-foot home, you may deduct 8% of your mortgage interest, utilities, insurance premiums, etc. for your home office deduction.
Which method should I choose?
The simplified method is very straightforward and requires little calculation or substantiation. If you have a small office, or are located in a low-cost area, it may not be worth the extra calculations and record keeping required by the standard method, and you may even come out ahead using the simplified method.
The standard method requires more recordkeeping and more complex calculations, but often results in a larger deduction, especially for larger homes or homes in more expensive areas.
Ideally, you should save all receipts and documents relating to your home expenses and crunch the numbers both ways to make sure that you obtain the maximum benefit from your home office deduction. Note that you do not need to elect the same method for each tax year.
Let's see how this looks in real life. John Ray owns Ray of Sunshine Landscaping. He offers landscaping services to residential homes in surrounding areas and performs all his bookkeeping and administrative work from a dedicated room in his basement. The room is 200 square feet and is used only for his business. His home is 2,000 square feet.
With the simplified method, John may deduct $1,000 (200 square ft x $5/ft) as his home office deduction.
Using the standard method, John calculates the following annual expenses:
- Mortgage interest: $10,000
- Utilities: $3,500
- Insurance premium: $1,000
- Repairs: $800
John's total annual expenses for his home are $15,300 and his office occupies 10% of his home (200 square feet out of 2,000). John's home office deduction is $15,300 x 10%, or $1,530. He should obviously elect the standard method for this tax year.
A comprehensive tax program will guide you through the process of claiming the maximum allowed home office deduction for your business. As always, careful record-keeping will pay for itself by allowing you to claim the greatest possible deduction for your home office space.
Find out more about Personal Taxes