All You Need to Know About the Home Office Deduction After Tax Reform

With nearly 40 percent of the American workforce working from home at least part of the time, many people wonder about the potential benefit of home office deductions – and if anything has changed since the passage of the Tax Cuts and Jobs Act (TCJA).

Like many other types of tax deductions, the home office deduction comes with multiple rules and best practices.

Why Is It Valuable?

The home office deduction is a potentially valuable deduction for self-employed individuals who are looking for ways to reduce their taxable income. This deduction is claimed using IRS Form 8829.

Who Qualifies?

The deduction can apply to taxpayers who use part of their home exclusively and regularly for trade or business purposes. Special rules apply to daycare providers. (Occasional or incidental uses don’t count.)

Here’s the catch: you must use the space as a main place of business, like where you meet with clients or customers during the course of a business day. The exclusive-use work area also must be an identifiable space and not be combined with personal-use space (such as the family room).

To qualify to claim expenses for business use of your home, you must meet both the following tests:

  • The part of the home must be:
    • Exclusively and regularly used for a trade or business,
    • Used for storage of inventory or product samples, or
    • Used as a day-care facility, AND
  • The business part of the home must be one of the following:
    • The principal place of business;
    • A place where the taxpayer meets or deals with patients, clients, or customers in the normal course of a trade or business or significant and essential to the conduct of the business; or
    • A separate structure (not attached to the home) that is used in connection with the trade or business.

And if you think you don’t qualify as a renter…think otherwise. Homeowners and renters are both eligible for a home office deduction – your home office just has to meet the above parameters to qualify.

How Do You Calculate The Home Office Deduction?

The home office deduction can be calculated in two ways: the regular deduction method or safe harbor.

Regular Method

This method involves totaling the direct and indirect expenses of your home office for deduction purposes. Expenses can include:

  • Mortgage interest payments
  • Real estate tax
  • Depreciation
  • Rent
  • Dwelling insurance
  • Utilities
  • Maintenance
  • General repairs

Direct expenses are only for the business use of your home, such as painting and repairing your office. Indirect expenses are for your entire home. Deductions using the regular method are based on the percentage of your home devoted to business use. Whether you work out of an entire room or just part of one, you’ll need to determine the percentage of your home used for business.

Safe Harbor

The safe harbor home deduction is a simplified way to claim a home office deduction. This option does not change the criteria for who may claim a home office deduction.

If you use this simplified option, you can multiply the allowable square footage of your office by a rate of $5. The maximum footage allowed is 300 square feet and thus the maximum deduction is $1,500. This option will save you time because it simplifies how you figure and claim the deduction. It will also make it easier for you to keep records.

Please note: whichever method you use, the deduction may not exceed gross income from your business less deductible business expenses that are not related to the home. Any excess amount is disallowed and may not be carried over to a future year.

Has Tax Reform Changed the Home Office Deduction?

Miscellaneous itemized deductions subject to the 2% floor were eliminated by the TCJA. This includes employee business expenses. Thus, between this year (2018) and 2025, employees may not claim the home office deduction.

Self-employed taxpayers are still permitted to take ordinary and necessary business expenses as a deduction on Schedule C per the usual rules.

The TCJA also limits itemized deductions for real estate taxes, mortgage interest, and casualty losses. However, these deductions are not limited for the business use part of your home. If you’ve been using the safe harbor method to figure your deduction in previous years, you may want to see if the regular method would now yield a higher deduction.

More Resources on The Home Office Deduction

While the concepts involved in home office deductions can be difficult, resources are at your fingertips, including a breakdown of Form 4562 and how it may apply to you and your small business.

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