Working from home, either as a remote employee or as your own boss, has become common. Businesses and those who are self-employed can cut expenses by eliminating the cost of traditional office space. And another big benefit is claiming the home office tax deduction.
But beginning in 2018, fewer taxpayers are eligible for the deduction due to the Tax Cuts and Jobs Act. If you work from home, here are 9 facts you should know about claiming a home office on your taxes.
1. Tax reform significantly changed the deduction.
Before tax reform, the home office deduction was available to anyone who maintained a dedicated space in their home that was used solely and exclusively for business purposes. It was available to the self-employed, and, in certain situations, to those working remotely as employees.
However, starting with the 2018 tax year, you’re no longer allowed to claim a home office deduction unless you’re self-employed. So, if you’ve grown accustomed to writing off a variety of expenses related to working from home as an employee, it’s no longer allowed.
2. You don’t have to be a homeowner to claim the deduction.
Many people don’t realize that you can claim the deduction no matter if you’re a homeowner or a renter. You can live and work in a single-family home, condo, apartment, co-op, mobile home, or even a live-aboard boat.
3. You must satisfy usage requirements to claim the deduction.
If you’re self-employed as a contractor, freelancer, or small business owner, you may be eligible for home office tax benefits. It doesn’t matter if your venture is full-time, part-time, or if you also work a day job.
One of the main requirements you must meet is using a certain part of your home on a consistent basis for your business. For example, you might choose to work from a guest room, a detached garage, or any identifiable space.
4. You can also work outside your home and claim the deduction.
Another main requirement to claim a home office deduction is that you use your home as the main place where you conduct business. However, it doesn’t have to be the only place you work or meet customers. For instance, you might also work occasionally at a coffee shop, a co-working space, or meet clients in their homes.
5. There are two ways to calculate the deduction.
The home office tax deduction you receive depends on the type of calculation method you choose and the types of expenses you have. You can choose one of the following methods for any year.
- The standard deduction requires you to determine the percentage of your home that’s used for business and apply it to your expenses. For example, if it’s 10% of your home, you can attribute 10% of qualifying expenses to business use.
- The simplified deduction allows you to claim $5 per square foot of your office area, up to a maximum of 300 square feet.
6. Working from home can make personal expenses partially deductible.
If you’re eligible to claim the home office deduction, it’s a smart way to make certain expenses—such as rent, mortgage interest, utilities, and insurance—partially deductible. It’s a terrific tax break because you get to claim a portion of many different types of expenses that aren’t deductible for the average homeowner or renter.
7. Your direct and indirect home office expenses are treated differently.
There are two types of expenses you should track when you have a home office: direct and indirect expenses.
- Direct expenses are for your office area only. For example, they might include installing flooring, window treatments, or an additional phone line in your office. These direct expenses are 100% deductible, no matter the size of the office.
- Indirect expenses are for your entire home. These are costs—such as rent, mortgage interest, property taxes, insurance, utilities, cleaning, and utilities—that you would have even if you didn’t have a home office. Indirect office expenses are partially deductible based on the size of your office and whether you choose the standard or simplified calculation method.
8. Your business expenses are fully deductible no matter where you work.
Don’t forget that your business expenses—such as office supplies, insurance, equipment, and software—are fully deductible as ordinary business expenses no matter if you work from home or not.
How you deduct an expense and how much of it is deductible depends on whether it benefits:
- your entire home, such as electricity and water
- the office space only, such as painting or carpeting just that area
- your business, such as a computer or software.
9. There’s a limit on how much you can claim for the deduction.
You can’t deduct more business or home office expenses than the amount of your business’ gross income. You can refer to IRS Publication 587 for more details.
Also, be sure to consult with a qualified tax accountant to help you maximize tax savings when you’re self-employed.