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?
You may feel that you have less incentive to itemize as the Tax Cuts and Jobs Act (TCJA) did away with many itemized deductions and nearly doubled the standard deduction. However, many self-employment deductions remain in place.
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, for example, 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 if you bought your home before December 16, 2017, the deduction is limited to interest on mortgage debts below $1 million. The TCJA lowered this limit to $750,000 for mortgage debt taken out after December 15, 2017. Under the new law, interest on home equity debt, no matter when it was incurred, may only be deducted if the debt was taken on to buy, build, or substantially improve your home. Previously, qualified mortgage insurance premiums could also be treated as deductible interest, but the TCJA eliminated that deduction for premiums paid or accrued after 2017.
- Real Estate Taxes – Details on deducting real estate taxes may be found in IRS Publication 530, "Tax Information for Homeowners." This deduction is now subject to the $10,000 limit for state and local taxes for married taxpayers filing jointly, or $5,000 for single taxpayers and those married filing separately.
- Casualty Losses – Casualty losses from fire and similar losses are deducted as either direct or indirect expenses, based on the type of loss. Under the TCJA, this deduction is only available for losses due to a presidentially declared disaster.
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.
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