To get a tax break for the business use of your home, you have the choice to either use the simplified method or regular method. The simplified option has easier calculations and a maximum square footage. If you use the regular method, you must determine the actual expenses of your home office. This involves going through your records for indirect and direct expenses and using IRS tax forms to help calculate the costs allocated to your home office space. All the extra work, however, could lead to a larger tax deduction.
Consider also: Calculate Home Office Deduction: Simplified Method
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Examining Home Office Deduction Qualifications
Like with either home office deduction, the actual expense method requires being self-employed. This means employees can't get this deduction for any reason through 2025, unless the IRS decides on changes due to the pandemic.
Your home office space must serve as the principal place of business for management or administrative activities. There must be exclusive use of the space for such business activities on a regular basis. So, if you have office space outside the home, you likely won't get this deduction.
In addition, IRS Publication 535 explains special rules for when you use part of your home for a daycare business or for the storage of product samples or inventory. So, taxpayers in these situations will need to review those details.
Consider also: When to Consult With a Tax Professional
After you've identified your business square footage and both indirect and direct business expenses, you'll want to fill out IRS Form 8829.
Determining Your Home Business Space
The IRS requires that you know the proportion of your home used for business and gives you two options for doing so. First, you could simply measure your home office space and divide the number of square feet by your home's total square footage. Second, if your home office spans multiple rooms, you might opt to instead find the proportion of business rooms to total rooms in your home.
If you run a daycare in a shared space, you'll want to consult the instructions on Form 8829 since the IRS requires assessing the number of hours of business use with a few extra calculations.
Calculating Your Home Office Expenses
You'll now need to identify and calculate direct expenses and indirect expenses for your home office space. This means looking at your records for business expenses and can require examining old invoices, receipts and bank statements.
Direct expenses include those only applying to your home office space and are usually fully deductible for businesses besides daycares. For example, if you purchased carpet for your home office or had something repaired in the room, then those would be direct expenses. You can usually just write off the full amount for each qualifying direct expense while the space was your home office, but you'll want to consult Publication 587 if you have an in-home daycare.
On the other hand, indirect expenses cover a wide range of costs that benefit the entire house and thus are only partly deductible for the proportion of your home where you conduct business. These include items such as your utilities, real estate taxes, mortgage interest, homeowners insurance and rent. You'll need to multiply such expenses by the percentage of business use. Also, if you used the home office space only part of the year, you'll need to multiply the indirect expense amount by the percentage of the year it was used.
Filling Out Your Tax Forms
After you've identified your business square footage and both indirect and direct business expenses, you'll want to fill out IRS Form 8829. Since this form asks for a lot of information, consider reading the IRS instructions along the way.
The first part will have you enter information you used to calculate the business square footage of your home. The second part requests the amounts of various direct and indirect expenses to get the full allowable amount on line 36. You may also fill out the third part if you're accounting for a home depreciation deduction and the fourth part for carrying over expenses to the next tax year.
You can then complete Schedule C to report your home office expenses on line 18 in part two alongside other deductible business expenses. The next steps include transferring business income to line 3 of Schedule 1 and transferring line 26's final amount to line 10 of your 1040 tax return. If you itemize deductions, you'll also fill out Schedule A and make sure not to double-deduct relevant home-related expenses you already claimed for the business space.
Consider also: Schedule C vs. Schedule E for Rental Income
- IRS: Home Office Deduction
- IRS: Simplified Option for Home Office Deduction
- IRS: Publication 535 (2020), Business Expenses
- IRS: About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)
- IRS: About Form 8829, Expenses for Business Use of Your Home
- IRS: Instructions for Form 8829 (2020)
- IRS: Publication 587 (2020), Business Use of Your Home
- IRS: Schedule 1