Can you take the Home Office Deduction?

Budgeting / By Humbled Budget

Humbled Budget Team

With over 55 years of combine experience in the Finance/Tax Industries based in the United States, Our Team of Humbled Individuals' shares their wisdom gained through experience or technical knowledge acquired through Additional Education.

If you are self-employed or own a small business, you may be wondering if you are eligible for the home office deduction. The Home Office deduction allows individuals to deduct some costs connected to the use of their home for business activities, potentially lowering their overall tax bill.

2021 was such a bizarre year where we saw an unprecedented number of workers and businesses using a work-from-home business model. If you work from home these important tax implications of setting up a home office must be on your radar.

With the rise of remote work, you may be wondering whether working from home will yield any tax breaks as any reduction of taxes help. If your small business uses your home office for business work does that qualify? How does a business qualify in the first place? Read below to see if you could possibly qualify to take the home office deduction.

Table of Contents

Am I allowed to take the home office deduction?

In essence in order to qualify for the home office deduction, you must meet one of these criteria:

Principal place: Your home office must be either the principal location of your business or a place where you regularly meet with customers or clients. Some exceptions to this rule include day care and storage facilities.
Exclusive and regular use: You must use a portion of your house, apartment, condominium, mobile home, boat or similar structure for your business on a regular basis. This also includes structures on your property, such as an unattached studio, barn, greenhouse or garage. It doesn’t include any part of a taxpayer’s property used exclusively as a hotel, motel, inn, or similar business and this would go on your Sch C.

If I’m an employee working from home, would I qualify for a home office tax deduction?

If you’re a W-2 employee working remotely at home rather than a business owner or working 1099 contractor, you unfortunately won’t qualify for the home office tax deduction. Your best bet would be to try and get reimbursed by your employer as many companies will take care of your internet bill and technology needs.

Contractors or business owners should take the deduction

If you are a small business owner who uses their home for business uses you should take the deduction. Of course, if you do not use the whole property, then you can calculate the area used in the home to come up with the deduction. As long as you follow and stay consistent with the IRS guidelines listed above take advantage as this deduction could change year by year.

What does “principal place of business” mean?

In addition to passing the exclusive- and regular-use tests, your home office must be either the principal location of that business or a place for regular customer or client meetings.

If your home office is in a separate, unattached structure — a detached patio with cover converted into an office, for example — you don’t have to meet the principal-place-of-business or the deal-with-clients test. As long as you pass the exclusive- and regular-use tests, you can qualify for home business write-offs. So that is helpful and wise to be aware as you work to take advantage of these deductions.

What if your business has just one home office, but you do most of your work elsewhere?

Remember that the requirement is that your home office is your principal place of business, not your principal workplace. As long as you use the home office to conduct your administrative or management chores and you don’t make substantial use of any other fixed location to conduct those tasks, you can pass this test.

If you’re an employee of another company but also have your own part-time business which you use your home, you can pass this test even if you spend much more time at the office where you work as an employee so you can take this deduction on your sch C.

This helps out many 1099 contractors who uses their home to conduct business meetings or even work. Many people have a secondary job which could be side gigs and this will help reduce tax liability.

How is the home office tax deduction calculated?

Your home office business deductions are based on either the percentage of your home used for the business or a simplified square footage calculation.

The most exact way to calculate the business percentage of your house is to measure the square footage devoted to your home office as a percentage of the total area of your home. If the office measures 100 square feet, for example, and the total area of the house is 1,500 square feet, your business percentage would be 15%.

An easier calculation which is acceptable by the IRS is if the rooms in your home are all about the same size you can figure out the business percentage by dividing the number of rooms used in your business by the total number of rooms in the house.

What is the simplified square footage method?

Starting in 2013, the IRS began offering a simplified option for claiming the deduction and method uses a classified rate multiplied by the allowable square footage used in the home.

For 2022, the stated rate is $5 per square foot with a maximum of 300 square feet for a maximum of deduction of $1,500.
If the office measures 150 square feet, for example, then the deduction would be $750 (150 x $5).
The space must still be dedicated to business activities so if you have your desk set up and keep all of your documents in that work space that would qualify.

With either method, the qualification for the home office deduction is determined each year when you file your return. Remember to always check in with a tax professional if you have any questions or doubts.