Home Offices and
Who can claim them?
Claiming home office expenses isn’t always as straightforward as you’ve been led to believe. Understanding who gets to claim them for tax purposes requires knowledge of your business, tax designations, and how these deductions work. Here’s what you need to know.
- The home office deduction is available to owners of a sole-proprietorship or partners of an entity that files a Form 1065 for a general partnership or LLC.
- For owners, the deduction is claimed on Schedule C for the business (using Form 8829 if applicable).
- For partners, the deduction is claimed as an “unreimbursed partner expense (UPE)” on the owner’s Form 1040, using Schedule E (and Form 8829 if applicable).
- S corporation and C corporation owners can’t take the home office deduction on their 1040s, since they are employees and employee business expenses are no longer deductible (since 2018). The corporation needs to reimburse the owners for any owner expenses, including home office.
What Qualifies as a home office expense?
The home office space needs to be used solely as an office – so if there is a desk in a bedroom, only the desk area qualifies for this deduction. You can’t claim a home office deduction if your business pays you rent for the space.
The office space must be used regularly (on a continuing basis) and exclusively (the space is used for business purposes only):
- As the principal place of business
- As a place to meet with clients
- In connection with the business if it is a separate structure
What’s the deduction limit for home office expenses?
First, the business portion of mortgage interest, property taxes, and casualty losses is deducted without any limitations. Then, the deduction of the business portion of other home operating costs (such as insurance, utilities, etc.) is limited to the business’s net income less the deduction for the fully allowed mortgage interest, taxes, and casualty losses allowed first. Disallowed deductions carry forward to the following year.
This means the mortgage interest, property taxes and casualty loss deductions can create a net loss for the business, but the other deductions cannot create a net loss.
Using the actual expenses method for home office expenses
A simpler method for calculating home office expenses
Calculating actual expenses for a home office can be time-consuming, for a relatively small deduction. It can also result in a taxable event when the home is sold. There is a simplified method available, where the deduction equals $5 per square foot for the office space (up to 300 square feet). This is often the preferred way to claim the home office deduction.
- The same criteria apply.
- Mortgage interest and property taxes are claimed 100% on Schedule A, instead of a proration.
- No depreciation is claimed.
- Form 8829 is not used.
- No carryforward is allowed.
Other Partner expenses
How to recordkeep home office expenses
Please provide totals by category to your tax manager for any out-of-pocket expenses. You will want to maintain receipts for your records in case of audit, but your totals are fine for our purposes. Common categories are (not an exclusive list):
- Total business miles driven (also need total miles driven) – consider a mileage tracking app, such as Mile IQ
- Total business meals (while traveling or for business meetings) and travel costs
- Total phone expenses (and business percentage to be applied)
- Total internet costs (and business percentage to be applied)
- Total office supplies, dues paid or subscriptions purchased
Still have questions?
Feel free to reach out if you are unsure about what we need to maximize your business deductions, or if you have any questions regarding home office and other deductions!