Home Office Tax Deductions- Your top ten questions answered

by | May 24, 2024

Are there tax breaks for working from home? If you own a small business and use part of your home for work, you may qualify for a tax deduction on your home office. However, should you worry that claiming this deduction will increase your chances of an IRS audit? What are the requirements to qualify for this deduction in the first place? This article will address 10 frequently asked questions about the home office tax deduction.

1. Do I meet the criteria for the home office tax deduction?

In general, to qualify for the home office deduction, you must satisfy one of these conditions:

Regular and exclusive use: You must regularly use part of your home, such as an apartment, house, mobile home or boat, exclusively for your business. This includes detached structures like garages, barns or studios on your property. It does not include any part of your property used solely as a hotel, motel or similar business.

Primary place of business: Your home office must be either the main location of your business or a place where you regularly meet with clients or customers. Some exceptions include daycares and storage facilities

2. If I’m an employee working from home, do I qualify for the home office tax deduction?

Unfortunately, if you are an employee working remotely rather than a business owner, you do not qualify for the home office tax deduction (although some states allow this deduction for employees). Before the Tax Cuts and Jobs Act of 2017, employees could deduct unreimbursed business expenses like the home office deduction. However, for tax years 2018 through 2025, these deductions for employee business expenses have been eliminated.

3. If I’m self-employed, should I claim the home office tax deduction?

You may have heard that claiming the home office deduction increases your chances of an IRS audit. While this was somewhat true in the past, changes to the tax code in the late 1990s made it easier for people who work from home to qualify for these deductions. So if you are eligible, you should claim it.

4. What constitutes “exclusive use”?

The biggest obstacle to qualifying for these deductions is that you must use part of your home solely and regularly for your business.

The law is unambiguous, and the IRS takes the exclusive use requirement seriously. For example, say you set aside a room in your home that you use exclusively for your business for 10 hours a day, seven days a week. If you allow your children to use the office to do homework, you violate the exclusive use requirement and lose the opportunity for home office deductions.

The exclusive use rule does not mean:

•You cannot make a personal call from the office.

•You have to rush out whenever a family member needs a moment of your time.

Although individual IRS auditors may interpret this rule more or less strictly, some tax experts say you meet the spirit of the exclusive use test as long as personal activities invade the home office no more than they would in an office building. The office can also be part of a room, and you can show that personal activities are excluded from the business section.

5. What constitutes “regular use”?

There is no set definition of what qualifies as regular use. Clearly, if you only occasionally use an otherwise empty room and its use is incidental to your business, you would fail this test. However, if you work in the home office for a few hours each day, you may pass. The IRS applies this test based on the specific facts and circumstances of each case.

6. What does “principal place of business” mean? 

In addition to meeting the exclusive and regular use tests, your home office must be either the primary location of your business or a place where you regularly meet with clients or customers.

If your home office is in a separate, detached structure—like a converted garage—you do not have to meet the principal place of business or client meeting test. As long as you pass the exclusive and regular use tests, you can qualify for home business deductions.

What if your business only has one home office, but you do most of your work elsewhere? Remember, the requirement is that your home office is your principal place of business, not your primary workplace. As long as you use the home office to conduct administrative or management tasks and do not substantially use any other fixed location for those duties, you can meet this test.

If you are an employee of another company but also have your own part-time business based in your home, you can meet this test even if you spend much more time at the office where you work as an employee.

This rule makes it much easier to claim home office deductions for those who conduct most of their income-generating activities elsewhere (e.g., outside salespeople or tradespersons).

7.  What constitutes a “business”?

As with the regular use test, whether your activities qualify as a business depends on the specific facts and circumstances. The more substantial your activities are in terms of time, effort and income generated, the more likely you are to pass this test.

Generating income from your efforts is a prerequisite, but for this tax break, profit alone is not necessarily enough. For example, if you use your den solely to manage your personal investment portfolio, you cannot claim home office deductions because your activities as an investor do not qualify as a business.

Taxpayers who use a home office exclusively to manage rental properties may qualify for home office tax status as property managers rather than investors.

8. What if I operate a childcare or storage facility?

The exclusive use test does not apply if you use part of your home to:

•Provide daycare services for children, seniors or individuals with disabilities. For example, if you care for children in your home between 7 a.m. and 6 p.m. daily, you can use that part of the house for personal activities during other times and still claim business deductions. To qualify for the tax break, your home daycare business must meet any applicable state and local licensing requirements.

•Store product samples or inventory that you sell in your business. For example, assume your home-based business sells home cleaning products and you regularly use half of your basement to store inventory. Occasionally using that part of the basement to store personal items would not cancel your home office deduction. To qualify for this exception, your home must be the primary location of your business.

9. How do I calculate the home office tax deduction?

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

The most precise way to calculate the business percentage of your home is to measure the square footage devoted to your home office as a percentage of the total area of your home. For example, if the office is 150 square feet and the total area of the house is 1,200 square feet, your business percentage would be 12.5%.

An easier calculation is acceptable if the rooms in your home are approximately the same size. In that case, you can determine the business percentage by dividing the number of rooms used for your business by the total number of rooms in the house.

Special rules apply if you qualify for home office deductions under the daycare exception to the exclusive use test.

•Your business use percentage must be reduced because the space is available for personal use part of the time.

•To do this, compare the number of hours the daycare business operates, including preparation and cleanup time, to the total number of hours in the year (8,760).

For example, assume you use 40% of your house for a daycare business that operates 12 hours a day, 5 days a week for 50 weeks of the year.

12 hours x 5 days x 50 weeks = 3,000 hours per year
3,000 hours ÷ 8,760 total hours in the year = 0.34 (34%) of available hours
34% of available hours x 40% of the house used for business = 13.6% business deduction percentage

10. What is the simplified square footage method?

Beginning with 2013 tax returns, the IRS began offering a simplified option for claiming this deduction. This new method uses a prescribed rate multiplied by the allowable square footage used in the home.

The prescribed rate is $5 per square foot with a maximum of 300 square feet.

For example, if the office is 150 square feet, the deduction would be $750 (150 x $5).

The space must still be dedicated to business activities.

With either method, whether you qualify for the home office deduction is determined each year. Your eligibility may change from one year to to the next.

Do you have further questions about home office tax deductions or need help staying on top of your numbers? Contact us at [email protected], we’d love to help!