More people than ever before are working from home, however not everyone can claim the home office deduction on their federal income tax return. The IRS rules regarding who can deduct expenses for maintaining a home office are strict and narrower than in prior years.
The 2017 Tax Cuts and Jobs Act eliminated unreimbursed itemized deductions for employees and, despite a surge in people working from home with the onset of the pandemic, Congress did not reinstate them. Accordingly, employees who are allowed to and choose to work from home generally cannot deduct expenses related to their home office. On the other hand, small business owners, self-employed individuals, and freelance workers may be able to avail themselves of this covered deduction.
This article explores who qualifies for the home office deduction and how to calculate it.
Who Qualifies for the Home Office Deduction?
The home office deduction allows qualifying taxpayers to deduct various expenses associated with maintaining a home office such as mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent on their tax return.
For purposes of the deduction, a “home” is defined as:
- A house, apartment, condominium, mobile home, boat or similar property.
- A “home” includes structures on the property such as a detached garage, studio or barn.
- A “home” does not include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.
We established above that if you are a salaried employees who receives W2 wages, you will not be able to deduct home office expenses unless you have a side business that you operate from home.
For entrepreneurs, small business owners and self-employed individuals who work from home, there are two requirements that must be met in order for the home to qualify for the deduction:
Exclusive and Regular Use
There must be a portion of the home used exclusively for conducting business on a regular basis.
For example, if you work during the day on your dining room table which is also used in the evenings for family dinner, you would not qualify for the deduction as the use of the table is not exclusive.
Similarly, a spare bedroom that is used to conduct business but also used as a playroom for children would be ineligible for the deduction.
If you use an extra room in your home you might be able to take the home office deduction only for that room so long as it is used both regularly and exclusively for the business.
Principal Place of Business
The home office must be either the principal location of your business or a place where you regularly meet with customers or clients.
You may qualify for the deduction even when you don’t meet with clients and customers in the home office if you use the office to perform administrative and management activities such as billing, scheduling, maintaining books as records.
Expenses that relate to a separate structure that is not attached to the home, like a detached garage may qualify without regard to the principal place of business requirement, if the entire structure is used regularly and exclusively to conduct business.
How to Calculate the Tax Deduction
The home office business deduction can be calculated using either 1) the regular method or 2) the simplified method.
Regular Method
When using the regular method of calculation, deductions for home office are based on the percentage of the home dedicated for the business. If your office space is 200 square feet and your home is 2,000 square feet, it follows that 10% of your home is used for the business. You would complete IRS Form 8829 Expenses for Business Use of Your Home by designating the 10% business percentage.
In addition to deducting a portion of home expenses based on the business percentage, taxpayers may also deduct direct costs in full that are incurred as part of repairs or maintenance to the office space. An example would be the cost of purchasing and installing shelving or painting in the home office.
Simplified Method
Starting in 2013, the IRS offered a simplified option to calculate the home office deduction which uses a prescribed rate multiplied by allowable square footage. For 2022, the rate is $5 per square foot of business use in the house where the maximum office size is 300 square feet. Accordingly, the maximum deduction under this method is $1,500 for tax year 2022.
Do You Need a Tax Attorney?
IRS audit selection can involve computer screening, related examinations and random statistical research. Selection does not establish an error. Review the notice and supporting records before responding. Related resources: tax returns.
It is advisable to consult with a tax attorney to obtain guidance on how to minimize audit exposure. If your tax return is selected for audit, a competent attorney can provide counsel regarding the information and documentation that will be necessary to successfully defend your tax return. A tax attorney can also help you avoid the assessment of additional taxes, interest and penalties.
Outcomes depend on the applicable rules and facts. Review the available options for the particular matter; another taxpayer’s result does not predict yours.
- Communicate with the IRS and assigned auditors throughout the entire examination process
- Present the supporting documentation with a view to best defend your tax return
- Defend the items reported on your tax return and minimize the assessment of additional tax
- Resolve any outstanding liability on appeal, including abatement of penalties wherever possible
- Avoid future tax audits of the same issue(s)
Confirm consultation terms, fees, staffing and the scope of any proposed work directly with the firm. Obtain the engagement terms in writing; no particular outcome is promised.
Have questions about this topic? Talk to an IRS attorney today.
Segal, Cohen & Landis, P.C. — Beverly Hills. Serving clients nationwide.
Samuel Landis, Esq.
LL.M. (Tax) · Selected to Super Lawyers®
Sam Landis is a Beverly Hills IRS tax attorney specializing in IRS collection defense, audit representation, and international tax compliance for foreign nationals and US expats.