If you operate a business out of your home, you may qualify for a home office deduction. However, because of the Tax Cuts and Jobs Act of 2017, even fewer taxpayers than in years past will be eligible for this deduction. Home office expenses for employees of companies are considered a miscellaneous itemized deduction. Under the law, from 2018-2025, company employees who work from home will not be able to deduct any home office expenses. If you are self-employed however, you can deduct eligible home office expenses against your self-employment income. There are eligibility requirements. The office must be your "principal place of business." A home office qualifies as a principal place of business if the following conditions are met:
- You use the office to conduct administrative or management activities for the business.
- There is no other fixed location at which you conduct these activities.
The home office space must be used regularly and exclusively for business. Any personal use of the area will make you ineligible for the deduction.
If you meet these requirements, you have two options for the deduction:
(1) You may deduct a percentage of your homeowner's insurance, home repairs, and utilities equal to the percentage of space the office occupies. Plus, you can deduct office improvements if they relate to conducting business. Homeowners are allowed to claim depreciation for the portion used for business, while renters can deduct a portion of the rent. Deductions cannot exceed income from the business, but excess deductions can be carried forward. Under certain circumstances, the sale of your house could result in a capital gains liability if you have taken advantage of home office tax breaks.
(2) Or, you can take the "safe harbor" deduction with the one calculation: $5 x the number of square feet of the office space. This is capped at $1,500 per year, based on a maximum of 300 square feet.
The IRS often audits individuals who take the home office deduction, so make sure you retain documentation supporting your deductions.