With remote and hybrid work arrangements becoming more and more prevalent in the business community, many parents now work from home at least some of the time. Generally, in order to claim any home office tax deductions, you must use the space exclusively as your principal place of business, or as a place to meet with patients, clients, or customers. If you’re self-employed as a sole proprietor, partner, or LLC member, you may be able to deduct the costs of maintaining an office at home.
In fact, current tax law gives you several ways to qualify for a home office write-off. Assuming you’re eligible, here’s the payoff:
- You can deduct 100 percent of any expenses that are directly related to your home office, such as an additional phone line.
- You can deduct a percentage of indirect expenses that relate to your entire residence, such as mortgage interest and property taxes.
There are special rules for qualified daycare providers and taxpayers storing business inventory or product samples.
The great thing about home office deductions is they go on Schedule C (if you are a sole proprietor or single-member LLC owner) or Schedule E (if you are a partner or member of a multi-member LLC). Write-offs that appear on these business schedules are double tax savers, because they reduce both your income and self-employment tax bills.
Of course, there are some restrictions on home offices, along with rules on recordkeeping requirements. And if you are an employee, different rules apply.
Home Office Tax Deduction Options
If you have set up a home office, there is an option that makes it simpler for qualifying taxpayers to include a home office tax deduction. The IRS has a simplified option that many owners of home-based businesses and some home-based workers may want to use to figure their deductions for the business use of their homes.
The deduction is capped at $1,500 each year based on $5 per square foot for up to 300 square feet.
Taxpayers claiming the optional deduction will complete a simplified form. They cannot depreciate the portion of their homes used in a trade or business but they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions. The deductions do not need to be allocated between personal and business use, as is required under the regular method.
From IRS.gov:
| Simplified Option | Regular Method |
|---|---|
| Deduction for home office use of a portion of a residence allowed only if that portion is exclusively used on a regular basis for business purposes | Same |
| Allowable square footage of home use for business (not to exceed 300 square feet) | Percentage of home used for business |
| Standard $5 per square foot used to determine home business deduction | Actual expenses determined and records maintained |
| Home-related itemized deductions claimed in full on Schedule A | Home-related itemized deductions apportioned between Schedule A and business schedule (Sch. C or Sch. F) |
| No depreciation deduction | Depreciation deduction for portion of home used for business |
| No recapture of depreciation upon sale of home | Recapture of depreciation on gain upon sale of home |
| Deduction cannot exceed gross income from business use of home less business expenses | Same |
| Amount in excess of gross income limitation may not be carried over | Amount in excess of gross income limitation may be carried over |
| Loss carryover from use of regular method in prior year may not be claimed | Loss carryover from use of regular method in prior year may be claimed if gross income test is met in current year |
Important: The simplified option does not change the regular restrictions on home office write-offs, such as requirements that a home office must be used “regularly and exclusively” for business and that the deduction is limited to the income derived from a particular business.
A taxpayer can elect from taxable year to taxable year whether to use the simplified method or to calculate and substantiate actual home office expenses. An election for any taxable year, once made, is irrevocable. “A change from using the new method in one year to actual expenses in a succeeding taxable year, or vice-versa, is not a change in method of accounting” and does not require IRS consent, according to the new Revenue Procedure.
Ask your tax adviser for more information about the simpler rules for deducting the cost of a qualifying home office.
Child Care When Using Your Home Office
If you work part- or full-time from home and need help when the children are also home, A New England Nanny is here. We have professional, reliable, thoroughly screened nannies and babysitters to entertain and educate the kids so you can meet your work obligations. Contact us at (518) 348-0400 to learn more.