Home Office Tax Deductibility 101

What You Can and Cannot Write Off

Home Office Tax Deductibility 101
March 21, 2016

Taxpayers tend to shy away from taking the home office deduction, assuming that they will be targeted for increased scrutiny from the IRS. That is certainly possible, especially if your deductions are unusually large – but if you truly were entitled to the deduction, why wouldn’t you take it?

Assuming you reviewed IRS Publication 587, “Business Use of Your Home,” and determined that you qualify, what are the home office expenses you can write off? They are covered in IRS Form 8829, “Expenses for Business Use of Your Home” and the corresponding instructions. You will need to file Form 8829 with your taxes to claim your deduction.

Expenses can be divided into two categories: direct and indirect expenses. Direct expenses apply only to the area designated as your home office, used exclusively and regularly for business purposes. Painting, wall repairs, or other maintenance applying only to that area will be fully deductible expenses.

Indirect expenses involve the maintenance of your entire home, such as your utility bill. These expenses are deductible to the percentage of your home that is used for business (if your home office is 10% of the square footage of your home, you can deduct 10% of all indirect expenses).

The majority of deductible indirect expenses are listed below. See Publication 587 and Form 8829 for other possibilities.

  • Mortgage Interest – IRS Publication 936, “Home Mortgage Interest Deduction,” provides details on calculating this deduction. Note that the deduction is limited to interest on mortgage debts below $1 million or home equity debts below $100,000.

  • Qualified Mortgage Insurance Premiums – Also discussed in Publication 936, this deduction may be limited or eliminated entirely if your adjusted gross income (AGI) is greater than $100,000 ($50,000 if married filing separately).

  • Real Estate Taxes – Details on deducting real estate taxes may be found in IRS Publication 530, “Tax Information for Homeowners.”

  • Casualty Losses – Casualty losses from fire and similar losses are deducted as either direct or indirect expenses, based on the type of loss.

Note: The four expenses listed above are deductible whether or not your home is used for business. If you itemize personal deductions, divide the business-related and personal components between Schedule C (business) and Schedule A (personal) appropriately. Do not double-report any expenses.

  • Utilities and Services – You may deduct a percentage of household expenses such as electricity, gas, water, trash, and cleaning services. Lawn and outdoor services generally do not qualify.

  • Repairs – Repairs applying to the entire home, such as repairing a central heating and air conditioning system, are deductible in the proper percentage.

    Be careful that the repair is truly a repair, and not considered a permanent improvement that increases the value (cost basis) of your home. Repairing the roof above your home office is a deductible repair; replacing the entire roof is considered an improvement.

  • Depreciation – IRS Publication 587 will show you how to calculate the cost basis of your home for depreciation purposes, as well as your actual depreciation and subsequent deduction component.

  • Rent – If you rent instead of owning your home, rent payments may be deducted using the same square-footage percentage basis.

  • Homeowner’s Insurance – The amount of premium paid for the tax year can be deducted, also on a percentage basis.

  • Security System – The operating expenses of a total home security system are deductible on a percentage basis, and the initial cost to purchase and install the system can be incorporated into the depreciation calculation.

You have the alternate choice of submitting a simplified deduction of a flat $5 per square foot of home office area claimed, up to a 300 square foot ($1,500) limit. Should you choose that path, the only business expenses you can deduct are items unrelated to the use of your home – for example, office supplies or equipment depreciation. Review your largest home office deductions to get a quick estimate of whether the simplified deduction works best for your situation.

If you are not comfortable with your home office deductions, seek the advice of a qualified tax professional before filing – but do not just give up on a deduction that you rightfully deserve based on a perceived increase in audit potential.


Photo ©iStock.com/PeopleImages

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Erin | 03.22.16 @ 17:02
We've never taken advantage of these deductions because it seemed like it wouldn't be enough of a savings to have to deal with all of the details. Of course, if we used our home office for business dealings more consistently, that would be another matter. Good information, thanks!
Alec | 03.22.16 @ 17:02
I will have to look in to this for next year as I've already done my taxes this year. I may actually qualify since I work from home and have expenses related to said work. Thank you for pointing this out. I need to do some research, it seems.
Jo Ann | 03.22.16 @ 17:03
these are great deductions, It is good to refresh your memory every year on these home business deductions. I use the standard rate of 5.OO dollars per sq. foot, vs % of space. It gives me a better write-off.
Steffanie | 03.22.16 @ 17:04
We are those people who have shied away from using our home office for tax deductions. We figure it wouldn't make enough of a difference anyway.
Heather | 03.22.16 @ 17:04
We do take advantage of these deductions for my home office. Its nice cause it helps with our return.
Carla Truett | 03.22.16 @ 17:05
Lots of great deductions as long as you know how much is eligible. I'm sure I would need a tax expert to help me sort through them.
gracie | 03.22.16 @ 17:05
I have never taken advantage of these deductions because I never wanted to get into the break downs and details. It was great to see the benefits laid out clearly. I may have a re-think on this
Beverly | 03.22.16 @ 17:13
Having run a business out of our home, I was aware of most of these. Definitely all good tips to be aware of and they definitely help.
Meredith L | 03.22.16 @ 17:14
If you've got a home office and you're organized enough to keep the details at hand, these are great deductions to get the most of your returns. Depreciation is a tricky thing though. Consult a professional because you don't want to red flag yourself.
Irene | 03.22.16 @ 17:15
Great info to keep in mind for tax season. I was not aware of some of these
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