Claiming a Home Office Deduction

If you use part of your home to conduct business, then you may be eligible to take a home office deduction on your federal income tax return. The requirements are fairly simple and, if you qualify, the deductions are reasonably generous.

In this publication, we're going to cover the topic of home office tax deductions. As part of that discussion, we'll first outline the qualification rules. Next, we'll explain how to go about calculating how much of your home expenses you can deduct from your federal income tax liability using an example. Finally, we'll quickly review the types of expenses allowed under the home office deduction, and touch on the tax records you should maintain.

Home Office Tax Deductions

Additional Resources

If you're a taxpayer, and you dedicate a portion of your home for business use, then you may be able to claim a deduction on your federal income tax return for the expenses associated with that portion of your home. It's not necessary to be self-employed to take this deduction, and homeowners as well as renters may qualify. As you'll soon see, there are only two requirements outlined by the IRS.

Qualifications for Home Office Deductions

To qualify for a home office deduction, you must meet one of the following requirements:

Exclusive / Regular Use

Part of your home must be used exclusively and regularly to conduct business. You cannot use this part of the home for any other purpose; it must be used on a regular basis to conduct business. In addition to the exclusive and regular use requirement, the home office must be either your principal business location, or one that is used to meet with customers or clients on a regular basis.

If you own a free-standing structure (such as a garage), and you use it exclusively and regularly for business purposes, then you can deduct expenses associated with that structure. This free-standing structure does not have to be the principal place of business for meeting with customers or clients.

Day Care and Storage

The above requirement does not apply if you use part of your home to provide day care services or to store products. For example, if you provide day care services from your home from 6:00 a.m. until 6:00 p.m., then you can use that portion of your home for personal activities the remainder of the day and still claim a home office deduction. To qualify for this deduction, your day care business must hold all applicable state and local licenses.

You might also qualify for a home office deduction if you use a portion of your home for business-related storage. This can include product samples and even business inventory. For example, you might use a spare bedroom to store inventory for an online business. The only caveat here is that your home must be the only location of this business.

Employee Qualifications

If you're an employee of a company, and you meet the above requirements, then the following provisions apply too:

Business use of your home must be for the convenience of your employer.
You cannot rent any portion of your home to your employer.
If the home office is only "appropriate and helpful," then you cannot deduct the business use of the home.

Calculating Deductions

There are two ways to determine the business percentage of the home. If all rooms in the home are about the same size, then you can simply divide the number of rooms used for business by the total number of rooms in the home. So if two rooms were used for business, and the home had 10 rooms, then 2 / 10 or 20% of the home was used for business purposes.

A second way to determine the business percentage would be to calculate the area of the home used for business, and divide it by the total area of the home. So if 250 square feet were used for business purposes, and the home was a total of 2,500 square feet in size, then 250 / 2,500 or 10% of the home was used for business purposes.

If you're running a day care center out of your home, you'd first calculate the above percentage of the home used to provide this service. Next, you would calculate the percentage of the year the home is used for day care purposes and multiply that percentage by the above value.

For example, let's assume 500 square feet of a 2,500 square foot home was used five days a week from 6:00 a.m. until 6:00 p.m. to provide day care services. From the above, we know that 500 / 2,500 or 20% of the home was used for business purposes. Next, we know the home is used 12 hours a day x 5 days a week x 50 weeks a year to provide day care services. There are 8,760 hours in a year, so the home would be used 60 hours a week x 50 weeks, or 3,000 hours per year. The portion of the year would then be 3,000 / 8,700, or 34.2% of the year. In this example, the percentage of business use would be 20% x 34.2% or 6.8%.

Allowable Deductions

When it comes to home office deductions, there are three broad categories of expenses:

Direct Expenses - these are expenses directly related to the home office itself. Examples of these direct expenses include painting the home office, and charges for long distance business calls made from your home's telephone. Direct expenses are fully deductible.
Indirect Expenses - these are expenses associated with running the entire home. Examples include rent, mortgage interest and real estate taxes (although these are normally tax deductible items), general repairs and maintenance (such as replacing a leaking roof), home insurance premiums, electricity, natural gas, fuel oil, trash removal, and cleaning services. Indirect expenses are not fully deductible, and are based on the percentage of the home used for business. If 20% of the home was used for business, then 20% of these indirect expenses are deductible.
Unrelated Expenses - these are expenses associated with parts of the home that are not used for business purposes. Examples include lawn care services, tree trimming, and direct repairs to non-business portions of the home such as painting a bedroom.

You're also allowed to take a deduction for the depreciation of the home's value. If the home office was used for the entire calendar year, then the deduction would be:

Deduction = 2.461% x Adjusted Home Value x Business Use (%)

Where:

Business Use (%) = percentage of the home that qualifies as a home office (examples provided earlier).
Adjusted Home Value = price paid for the home plus permanent improvements.

Finally, there are limits to the amount that can be deducted from your federal income tax liability. Generally, the home office deduction cannot be greater than the business income generated at home.

Recordkeeping Requirements

If you're going to claim a home office deduction, then you must maintain records of all calculations as well as receipts, checks, and other documentation. You must maintain these records for the longer of: