Over the last five years, the number of Americans working from home full time has gone from boom to bust. Unfortunately, full-time employees still can’t claim a tax deduction for home office expenses—that tax benefit is reserved for freelancers and small-business owners.
Up until tax year 2017, full-time W-2 employees could write off some of their unreimbursed home office expenses as itemized deductions. The Tax Cuts and Jobs Act (TCJA) of 2017 suspended this once-popular tax break until 2025.
“Self-employed individuals, independent contractors, and business owners who use a dedicated space for work can claim a home office deduction," says Rachel Richards, CPA and Head of Product at Gelt.
People who in addition to a W-2 job have income from freelancing or a side hustle, or run their own business, may be able to take the home office deduction. There are tight conditions on this tax break—for instance, the space where you conduct self-employed business must be separate from where you work at home as an employee.
Richards notes that there are a few states that still allow employees to deduct unreimbursed home office expenses that are required for full-time work. The TCJA is set to expire at the end of 2025, and it’s currently unclear whether or not Congress will choose to extend these provisions.
Understanding the home office tax deduction
Small-business owners and freelancers who work in their homes may be able to itemize for deduction expenses like mortgage interest, rent, utilities, maintenance costs, real estate taxes, and others. Notably, they cannot deduct mortgage payments.
As noted above, you must have a designated space where you conduct self-employed business, but it doesn’t need to be an entire room, says Richards.
“Many people assume they need a completely separate room for a home office deduction, but even a designated portion of a room can qualify as long as it’s used exclusively and regularly for business purposes,” she says.
In addition, the space must meet the following qualifications:
- It must be used exclusively for business purposes
- It must be used regularly—not sporadically
Each of these points are crucial. You can’t deduct your entire living room as a home office, for example, because you use the space for other purposes. But you could deduct a small portion of that space if you have a desk set up in the corner that is exclusively used for your business needs.
And when we say “exclusively,” the IRS takes that seriously: This space in your home shouldn’t contain anything you use for non-business purposes. If your top-of-the-line gaming PC, expensive desk, and comfy chair are used for both business and pleasure, they don’t qualify for the deduction.
Eligible taxpayers don’t have to do complex calculations
If your home office meets the above qualifications, there are two methods you can use to calculate the total amount you can deduct. Both require
The simplified method is, as the name suggests, simple: a flat $5 deduction per square foot of office space in the home, up to 300 square feet or $1,500. One of the biggest perks of this option is it doesn’t cause depreciation of your home—nor is there any recapture of that depreciation when you sell the house in the future. This method is also known as the “safe harbor” home office deduction.
The regular method requires extensive recordkeeping, but can potentially net you a larger deduction each year depending on the size of your space and how much you spend on it. First, calculate the square footage of the space in your home that is used for business purposes. Then, divide that by the total square footage of the home to determine the eligible percentage of space. If you use 200 sq. ft. of your 2000 sq. ft. home for your business, that would be 10% of the space.
Use this figure to determine the percentage of mortgage payments, utilities, repairs, insurance, and other applicable expenses that you can deduct. In the above example, if your monthly mortgage is $3,000 (or $36,000 per year), you’d be able to deduct 10% of that total, or $3,600. Use these same calculations on other eligible expenses to determine the total amount you can deduct.
There’s no limit to how much you can deduct (up to that percentage) and right off the bat, you’ll see what I meant about this option providing a larger deduction—but naturally, there’s a catch.
Logan Allec, CPA and founder of Choice Tax Relief points out that using this method requires calculating depreciation in the portion of your home that serves as an office. He says, “While this will increase your home office deduction, it will also mean that when you sell your home, you will have to pay depreciation recapture tax.”
Allec advises that taxpayers calculate figures carefully, and consider using the simplified method for this deduction—especially if the difference in deduction amount between the simplified method and the actual method isn't that large.
The home office deduction takeaway
While the home office deduction isn’t as accessible as it once was, it’s still worthwhile for millions of taxpayers who rely on using their homes for business purposes.
Richards reminds potential users to keep thorough records and to consult a tax professional to maximize savings and stay compliant with changing regulations. For full details on how to deduct the business use of your home, read Publication 587 from the IRS.
