What to know about work from home tax deductions

These days many of us work from home full time or are self-employed, so we have dedicated office space in our house. If you’re in this category, it’s worth exploring if you qualify for tax breaks for working from home.

What is a Tax Write-Off?

A tax write-off is an expense that you can deduct from your taxable income, reducing the amount of income that is subject to tax. Essentially, it lowers your overall tax liability. For example, if you have a $1,000 tax write-off and you are in the 24% tax bracket, you could save $240 in taxes.

Tax planning for your home office

Qualifying allows for a number of deductions, including real estate taxes, mortgage interest, rent, utilities, home insurance, and maintenance and repairs. Of course, there are requirements you must meet to receive home office tax benefits, with the first ones being obvious. You must use a portion of your home exclusively for conducting business on a regular basis, and this location must be your principal place of business. This means that space should not double as a multi-purpose room; rather, it should serve as a dedicated office area where you carry out your work activities.

Additionally, maintaining consistency in how this space is used is key, as the IRS stipulates that the office must be used regularly and exclusively for business purposes to qualify. It's crucial to document your usage of the space thoroughly, as you may need to provide evidence that it meets these qualifications in case of an audit. Furthermore, ensuring this location is the main venue for your business operations is paramount, indicating that significant managerial or administrative functions are conducted there, even if you have other business sites.

If you're an independent contractor, self-employed individual, or run a small business from home, your tax situation is likely different from that of a traditional employee receiving a W-2. The 2017 Tax Cuts and Jobs Act made it clear that employees cannot claim a home office deduction, raising the importance of understanding one's employment status. However, for those filing as independent contractors with a 1099 form, the door remains open to home office deductions. These deductions can significantly ease the financial burden by allowing you to write off a portion of your home used exclusively for business purposes. This can include allowable expenses such as utilities, mortgage interest, and maintenance expenditures.

It’s important to note that the approach to deductions varies, and precise record-keeping is essential to back up any claims. Qualifying for these deductions requires demonstrating that your home office is the principal place of business, used regularly and exclusively for work-related activities. Thus, there’s potential for a substantial tax benefit for those who understand how to navigate their employment status and appropriately document their home office use.

What can you deduct from your home office expenses?

You can deduct expenses directly related to your home office, such as:

• Real estate taxes
• Mortgage Interest
• Rent

Utilities (including internet)

• Home Insurance
• Maintenance and Repairs

In addition, there are some other work from home tax deductions you might be able to claim for your home office: 

• If you own your home, you can depreciate the part of your home used for business. This involves deducting a portion of the cost of your home over several years.¹

Items like paper, pens, and other supplies used exclusively for your business can be deducted.

• You can deduct the cost of office furniture and equipment, such as desks, chairs, computers, and printers. If these items are used exclusively for business, they can be fully deducted. Otherwise, you may need to prorate the deduction based on the percentage of business use.¹
• Any repairs or maintenance specifically for your home office can be fully deducted. General repairs that benefit the entire home, such as fixing a leaky roof, can be partially deducted based on the percentage of your home used for business.¹
• If you have a separate phone line and internet connection for your business, these costs can be fully deducted. If you use a single line or connection for both personal and business use, you can only deduct the portion used for business.¹
• Fees paid to accountants, lawyers, or other professionals related to your business can be deducted.¹
• If you have insurance specifically for your business, such as liability insurance, you can deduct these premiums.¹
• If you travel for business purposes, you can deduct expenses such as transportation, lodging, and meals. However, these must be directly related to your business activities.¹
• To write off utility expenses such as the internet, the portion of the expense must be directly related to your business use. For example, if you use your internet 50% of the time for business and 50% for personal use, you can only deduct 50% of your internet expenses.

Remember, to claim these deductions while working from home, you must keep detailed records and receipts. It’s also a good idea to consult with a tax professional to ensure you’re maximizing your deductions while staying compliant with tax laws.

Nevertheless, there are certain items you still won’t be able to claim. Generally, you can’t deduct expenses for the parts of your home not used for business. Examples include expenses for lawn care or painting a room that is not used for business.

How should you calculate your business expenses and deductions?

Calculating your business expenses for home office deductions can be approached in two distinct ways, both offering unique benefits depending on your individual circumstances. The regular method requires a detailed assessment, where you accurately divide your home expenses based on the portion of your home used for business. This method can potentially yield a more tailored deduction since it considers actual expenses such as utilities and home maintenance but requires meticulous record-keeping. On the other hand, the simplified option offers a straightforward alternative, allowing you to deduct using a flat rate of $5 per square foot for up to 300 square feet.

While this method caps at a $1,500 deduction, it significantly reduces the complexity of calculations and record maintenance. It's pivotal to choose the method that maximizes your tax benefit and aligns with your business's financial operations. Additionally, ensure that your deductions do not exceed your business’s net income, as any excess can be carried over to the next year. Carefully evaluating both methods and considering their implications on your overall tax liability will help you make an informed decision that supports your financial strategy effectively.

Regardless of the method, you can only deduct home office expenses up to your business’s net income (revenues minus other expenses) and carry over the rest to the following year. You can’t claim home office deductions that cause your business to operate at a loss.

If you have any questions about home office tax planning or tax strategies in general, partner with a CPA, who can connect with your planner, so you can discuss tax solutions in the context of your full financial picture.

This article is for informational and educational purposes only and does not constitute an offer, solicitation or advertisement with respect to the purchase or sale of any security. All investments have inherent risks. There can be no assurance that the investment strategy proposed will obtain its goal.