Home Office Deduction: What Self-Employed Business Owners Should Know
A home-office deduction may be available to qualifying self-employed taxpayers and partners, but working from home by itself does not automatically make household expenses deductible. Eligibility depends on how the space is used and how it relates to the business.
Exclusive and regular business use
In most cases, the area must be used exclusively and regularly for business. A room or clearly identifiable portion of a room can qualify, but a space used for both personal and business activities generally does not satisfy the exclusive-use test. Special rules apply to inventory storage and daycare facilities.
Principal place of business
A home office may qualify as a principal place of business when it is used for administrative or management activities and the taxpayer has no other fixed location where substantial administrative or management work is performed. A separate structure used regularly and exclusively for the business may also qualify.
Two ways to calculate the deduction
Under the regular method, qualifying taxpayers allocate direct and indirect home expenses between personal and business use. Potential expenses can include the business portion of rent, mortgage interest, real estate taxes, utilities, insurance, repairs, maintenance, and depreciation. Self-employed Schedule C filers generally calculate the regular-method deduction on Form 8829.
The simplified method uses a prescribed rate of $5 per square foot for up to 300 square feet of qualified business space. This can produce a deduction of up to $1,500, subject to the applicable income limitation. The simplified method does not allow depreciation or a carryover of unused home-office expenses.
Keep supporting records
Maintain measurements of the workspace, records showing how it is used, and receipts or statements supporting expenses claimed under the regular method. Review the calculation each year because a change in the space or business use can affect eligibility.
Confirm the rules for your situation
Home-office deductions are fact-specific. Review the current IRS guidance on business use of a home and Publication 587, and consult a qualified tax professional before claiming the deduction.
This article provides general information and is not individualized tax or legal advice.
Crunch Consulting can help you evaluate business deductions and organize the records needed for tax preparation. Contact us to discuss your situation.
