What Is a Home Office Expense?

What Is a Home Office Expense?

Let me tell you directly: home office expenses are the costs you incur when running a business or doing work-related activities right in your main home.

Key Takeaways

If you're operating a business from home, the expenses tied to that can be deducted from your federal taxes, but there are limits you need to know. You have options to figure out your deductions—either add up all your costs and determine the percentage of your home used for business, or go with the simplified method for the same result. Remember, the Tax Cuts and Jobs Act of 2017 shook up the deduction rules, so stick to info published in 2018 or later to stay accurate.

Understanding Home Office Expenses

These expenses let you deduct parts of your housing costs, like utilities, mortgage interest, and property taxes, on your annual tax return. The IRS lays it all out in Publication 587, so that's where you should look for the full details on deductions.

Home Office Deductions

If you're self-employed and running a business from home, the expenses from that can form the basis for deductions that cut your tax bill. Things used only for business, like supplies, phone lines, or computers, can be fully deducted. How much you can claim depends on factors like how you file your return and your income, but most people can deduct several items as long as they're part of normal business operations.

Your home office qualifies for these deductions only if it fits specific criteria. It must be used exclusively and regularly as your main business spot, or for meeting clients in your trade, or if it's a separate structure tied to your business, or for regular storage, or as a rental for your business, or even if you run a daycare from home.

The Exclusive and Regular Use Rule

The key here is 'exclusive and regular'—the space has to be dedicated solely to your home office and used that way consistently. As the IRS puts it, it doesn't need a permanent divider, but you can't use the area for both business and personal stuff. If you've got a desk corner just for business transactions, that counts, but if you're working on a laptop from the couch while family's watching TV, forget claiming the couch.

How to Calculate Home Office Expenses

The IRS gives you two ways to figure out your home office portion and deductible expenses: the regular method with actual costs, or the simplified method that's quicker but might give you fewer deductions.

The Regular Method

Start by sorting your business expenses into direct, indirect, or unrelated. Direct ones are things like repairs just in the business area; indirect are whole-home costs like insurance or utilities that benefit the office too. Then, calculate the business percentage of your home—either divide the business area's square footage by the total home area, or if rooms are similar sizes, divide the number of business rooms by total rooms. You'll need good records, and the IRS has a worksheet to help. Just note: if your expenses top your business income, you can only deduct a portion.

The Simplified Method

Introduced in 2013, this method makes things easier. You need the allowable business area of your home, your gross income from home business use, unrelated business expenses, and for daycares, the time percentage used. Multiply the area by $5 (or less for non-exclusive daycare use), subtract unrelated expenses from gross income, and take the smaller of those two amounts as your deduction. Rules limit this—like you can't both deduct the same space if sharing—and more details are in Publication 587.

Real World Examples of Home Office Expenses

Take a freelance writer running their business from home: they've got a 200-square-foot dedicated office, a work-only cell phone, and a magazine subscription for leads—all deductible, including that office space since it's business-exclusive. They can also deduct printer ink, the full cost of a new printer for contracts, and any industry training.

But watch out: the Tax Cuts and Jobs Act caps property tax deductions at $10,000, so you can't use home office rules to get around that. Lots of expenses qualify if you work from home, whether self-employed or remote, and a tax specialist can check what's valid. For example, if that writer worked from a coffee shop instead, no home utilities or mortgage deductions, but maybe the daily coffee and donuts could count elsewhere.