Home Office Tax Deductions: What Business Owners Need to Know

As a business owner, you may be able to lower your taxable income by claiming home office deductions. However, it’s essential to follow IRS guidelines to ensure compliance and minimize audit risks. There are two ways to claim this deduction: the actual expense method and the simplified method. Below are answers to common questions about this tax break.

Who Qualifies for the Deduction?

You may qualify for a home office deduction if a portion of your home is used regularly and exclusively as your principal place of business.

Even if your home isn’t your main place of business, you might still be eligible if:

• You meet with clients, patients, or customers at home, or

• You use part of your home (such as a storage area or detached structure) exclusively and regularly for business purposes.

What Expenses Can Be Deducted?

Many business owners choose the actual expense method, which allows deductions for:

• Direct expenses: Costs related solely to the home office, such as painting or carpeting the space.

• A proportionate share of indirect expenses: These may include rent, mortgage interest, property taxes, utilities, insurance, repairs, and maintenance.

• Security system costs, if necessary for your business.

• Depreciation of the home office portion.

While this method can result in larger deductions, it requires careful recordkeeping.

How Does the Simplified Method Work?

For a more straightforward approach, the IRS offers a simplified method, allowing you to deduct $5 per square foot of office space, up to 300 square feet (a maximum of $1,500).

However, if your home office is larger or your actual expenses exceed the simplified calculation, the actual expense method may be more beneficial. Keeping track of your costs can help you decide which method provides the biggest tax break.

Can You Switch Between Methods?

Yes! You can choose the best method for your situation each year. For example, you might use the actual expense method on your 2024 tax return, switch to the simplified method in 2025, and then go back to actual expenses in 2026.

What Happens If You Sell Your Home?

If you sell your home at a profit after claiming home office deductions, you may face tax consequences. If you find yourself in this situation, don’t panic! We can help you understand your tax impact when you’re ready to file.

Additionally, home office deductions are subject to income limitations based on business profits. If you can’t deduct the full amount in one year, you may be able to carry over the unused portion to future tax years.

Do Employees Qualify?

Under the Tax Cuts and Jobs Act, employees cannot claim home office deductions through 2025, even if they work remotely and their employer doesn’t provide office space. This deduction is only available to self-employed individuals and business owners.

Need Help with Home Office Deductions?

Claiming home office deductions can lead to significant tax savings — but only if done correctly. We can guide you through the process, help determine your eligibility, and ensure you maximize your deductions.