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You can claim the federal home office tax deduction if you're self-employed and use part of your home or an unattached structure on your property, like a studio or garage, to run your business. Unfortunately, if you're an employee of a company and you work part-time or full-time from home, you don't qualify.
There's a simplified way to figure the deduction by square foot, or a more detailed way that requires receipt-based documentation. The amount and type of expenses you've incurred as a business owner will determine which method is best for you.
Don't be intimidated by the potential complexity of the deduction; it's often worthwhile for self-employed workers whose business expenses can add up throughout the year. Here's what to know.
Who Can Take the Home Office Tax Deduction?
You may qualify if you're:
- Self-employed full-time or a small business owner. That means employees who work from home, even exclusively, aren't eligible. You're an employee if you fill out a W-2 form to have your company deduct taxes directly from your regular paycheck.
- Employed by another company but you run a business part-time and use an area of your home exclusively for your business. As long as you meet the test for "regular and exclusive" use described below, you can take the deduction.
- Either a renter or a homeowner. The tax deduction is available regardless of whether or not you own your living space.
Qualifying spaces for the home office tax deduction include:
- An apartment, house, mobile home, condo or boat and detached or semi-detached areas on the property dedicated to work. That means you can take the deduction if you have an office in your house or a dedicated section of your studio apartment. You can also qualify if your work requires you to mostly travel or spend time out in the community but you have a space at home specifically for administrative activities or meetings.
- A space used "regularly and exclusively" for your business, according to the IRS. Regular use means you conduct business activities there on a consistent basis, not once in a while. Exclusive use means the space is set aside specifically for running your business, and others don't share it for non-business activities. For example, a room in your home that's a multi-use space for both your business and homeschooling your child wouldn't count.
- A part of your property that is used as a hotel or inn isn't eligible for the deduction
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How the Home Office Tax Deduction Works
The home office tax deduction works like other deductions in that it lowers your taxable income, which may reduce the amount of tax you pay overall. A tax credit, on the other hand, directly lowers your tax bill for every dollar in credits you receive.
You can choose between two methods for taking the home office tax deduction:
- Square footage calculation: The simplest option gives you a deduction of $5 per square foot of space used for business activities, up to 300 square feet total. The maximum deduction you can take, then, is $1,500. If you're a single filer in the 24% tax bracket, that $1,500 corresponds to a maximum of $360 in tax savings for the year.
- Eligible expense calculation: The more involved, but potentially more profitable, option is to deduct all eligible expenses for which you have receipts. This requires knowing if your expenses are direct or indirect expenses. Direct expenses are those that were only used in your home office, like a new printer. You can deduct the full amount of these expenses. For indirect expenses, like monthly internet access that benefits your whole home, find the percentage of your home that your office or workspace corresponds to, then take that percentage of the expense as a deduction.
How Much Can You Save With the Home Office Tax Deduction?
Before deciding which type of calculation you want to use for your home office expenses, it's beneficial to run the numbers.
Here's an example. Let's say you have a 200-square-foot garden shed in your backyard that you turned into a home office, where you work as a self-employed web designer. You're single, and will earn $65,000 in 2022. That puts you in the 22% tax bracket.
If you use the simple method to figure the deduction, you'd get a $1,000 deduction for the 200 square feet you use for business. That would mean $220 in tax savings.
If you choose to deduct all eligible expenses for the year, categorize them by direct and indirect. Let's say you spent $2,000 on business supplies and repairs to the space itself. Those are direct expenses and can be deducted in full. If the shed is 20% of your 1,000-square-foot home, you can deduct 20% of the cost of your utilities, for example, which are indirect expenses. If that comes to $400 for the year, you would deduct $2,400 total (adding your direct expenses to your indirect expenses), netting you $528 in tax savings.
Just remember you'll need to have receipts ready to back up your claims with this method, and the help of a skilled tax professional may be beneficial to ensure you're doing everything correctly.
The Bottom Line
The home office tax deduction can be a valuable tool for reducing your tax bill each year. It's important to make sure that your activities, space and expenses all qualify according to the IRS' specific rules.
Still, know that it's possible to go for the simplified way of deducting expenses if you're overwhelmed, which can still mean solid savings. And for those filing a tax return with the help of an accountant, or who are willing to deduct individual expenses, the savings can be even greater.