If you're self-employed and work from home, you may be able to save some bucks at tax time by using the home office tax deduction. You have two choices on how to claim it, and those choices depend on your preference for time savings or money savings.
Home Office Deductions: Choose the Simple or Complicated Way
1. The complicated way. Fill out IRS Form 8829 — all 44 lines of it. Figure the proportion of your home's overall space devoted to your office and then calculate how much of your overall home expenses went toward your home office. Lots of math happening here.
An example: If your home office takes up 300 square feet in a 3,000-square foot house, you're using 10% of your home for your work. So you can take 10% of costs like utilities, homeowners insurance, homeowners association fees, security, and general repairs and maintenance.
Pro Tip: Not sure how big your house is? Check the documents you got when you bought your home — there's probably a detailed rendering. Or measure it. Or check your property tax bill.
2. The simplified way. Take $5 multiplied by your home office's square footage up to 300 square feet or $1,500 maximum deduction and, boom, you're done. You won't have to keep track of your actual expenses. Very little math happening here.
If you take the simpler math option, you may not be able to deduct as much as you can with the regular method. You can't depreciate your home office, for example. So consider the value of your time against potential tax savings if you believe you're eligible for more than the $1,500 cap.
Here are some other things you need to know.
What Counts As A Home Office For Tax Deduction?
A room or defined area of your home you use just for business. It can't double as your craft room or home gym. Also, that space must be your principal place of business, or the place where you see customers.
Pro Tip: If you use your home as the sole location of your business and store your inventory there, the place where you store your products does not have to be just for business. Let's say you run a business selling jewelry from a room in your basement.
If you store your jewelry inventory in another part of the basement that is separate and identifiable, you can deduct that space even if you use the rest of the basement as a man cave, home gym, or guest room.
Home Deductions When You Travel for Work
You don't have to do all your work from home to take the home office deduction. If you're a freelance journalist, you probably spend a lot of time outside of your office interviewing people. As long as your home office is essential to your business, and you spend substantial time there, doing your writing or other work, you're good.
Use Your Separate Structures for Home Deductions
Separate structures on your property, like a detached garage you've converted to an office or studio, are eligible for the home office deduction.
Unlike an office inside your home, a separate structure doesn't have to be your main place of business to qualify for a deduction. That's because the IRS believes your family is less likely to use a separate structure as a part-time play area or den, says Mark Luscombe, principal analyst for tax and consulting at CCH.
Home Office Deductions for In-Home Care Providers
Why, yes. We're glad you asked. If you provide in-home daycare services for children, the elderly, or disabled persons as a licensed or authorized business, you don't have to use the space exclusively for the daycare business to take the home office deduction.
You calculate your deduction by dividing the number of hours you used your home workspace to provide daycare services during the year by the total number of hours during the year.
For example, if you do daycare 40 hours a week for 50 weeks a year, that's 2,000 hours a year, divided by the 8,760 hours in a regular year equals 22.8%. So you could take 22.8% of the ($1,500 maximum deduction — $5 per square foot times 300 square feet maximum) simplified deduction for your daycare workspace.
Home Deductions for Remote Employees
Although freelancers can realize tax benefits, full-time remote employees who use their home exclusively and regularly for business can't. The benefit for remote workers was excised in the Tax Code revamp enacted by Congress in late 2017.
Home Office Deduction: Don't Forget Depreciation
Depreciation is based on the idea that everything — even a home — wears out eventually. Here's how to figure out home office depreciation:
- Add the home's purchase price to the cost of improvements.
- Subtract the value of the land it sits on.
- Multiply that cost basis by the percentage of your home used for work. This gives you the tax basis for your home office.
- Divide by 39 years (this is the standard number required by the tax law.)
For example:
- Purchase price: $100,000
- Value of land: $25,000
- Cost basis: $75,000, plus cost of improvements you’ve made
- Tax basis: $75,000 x 10% = $7,500
- Depreciation deduction: $7,500/39 years*
For a crash course on depreciation, tax to a tax pro or read IRS Publication 946. If you opt for reading the IRS pub, make a large pot of coffee.
Pro Tip: Depreciation deductions on your home office may increase the amount of profit on a home sale that's subject to taxes. Most taxpayers don't owe income tax on up to $250,000 of profit if you're a single filer, $500,000 for joint filers. Talk to a tax professional on how depreciation deductions affect your tax liability when you sell.
Related: How the Tax Law Affects Mortgage Interest and More
This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.