Home Offices and
Other Expenses

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

Direct Expenses

These benefit only the business part of the home are 100% deductible against business income. An example would be paint or flooring expenses for the office space only.

Indirect Expenses

These benefit the entire home, are deducted by applying the Business Use percentage. Examples are: mortgage interest, real estate taxes, rent, utilities, insurance, security costs, depreciation.

The Business Use

A percentage is determined by any reasonable method. The most common method is to determine the percentage of floor space used for business v. the total floor space. Rooms used for business v. total rooms is another reasonable method.

Depreciation

Calculated using the home’s cost (or fair market value if lower) over 39 years, and any depreciation claimed should be recaptured upon sale of the home at a gain – this is a big disadvantage of using actual expenses to calculate the deduction. Form 8829 is used to calculate this deduction.

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

A general partner can claim a deduction for other out-of-pocket expenses as Unreimbursed Partner Expenses (UPE)

Can include auto mileage (or actual costs), phone expenses, business meals, etc.

Claimed on Schedule E, with the K-1 income/loss

The same concepts apply to sole proprietorship owners and the expenses are deducted on Schedule C.

UPE reduce SE tax and the Qualified Business Income Deduction, if applicable

Caution: To be deductible, the partnership agreement must state that the partner is required to pay these expenses out-of-pocket.

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!

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Home Offices and Other Expenses