Home Office Deduction and the IRS

In 2020 and 2021 more people than ever started their own business because of the
pandemic. As a result, those people may now qualify for the home office deduction. The home office deduction allows self-employed people (including gig workers and independent contractors) to deduct expenses for the business use of their homes if they meet IRS requirements.  

The home office deduction is available for both homeowners and renters. This includes
homeowners and renters of mobile homes.

There are two requirements needed to qualify for a home office deduction. An eligible taxpayer must exclusively and regularly use part of their home for conducting business and show use of their home as the principal place of business. In the case that business is conducted at a location outside of the home, you may still qualify if the home is substantially and regularly used to conduct business.

Once you have determined if you are eligible, you will need to choose a method to calculate thehome office deduction.

Option 1: Simplified Square Footage Calculation

This option allows a taxpayer to use a prescribed rate that is then multiplied by the allowable square footage used in their home to calculate the home office deduction. There is a standard deduction of $5 per square foot of home used for business with a cap of 300 square feet. This option reduces burden by allowing you to avoid determining actual expenses.

Option 2: Percentage of Home Used for Business

Called the regular version, this option requires taxpayers to keep track of all their actual
expenses. Expenses can include everything from repairs to mortgage interest, insurance, utilities, and depreciation.

From there, you will need to calculate the percentage of your home devoted to business use. to One way to do this is to divide the area of your home used for business by the total area of your home. This is called the area-method. If you need assistance, the IRS Form 8829 can help you figure out exactly which expenses are eligible for business use of your home.

In the case that all the rooms in your home are nearly equal in size, you can use the number-of-rooms method. This means you will figure out the business percentage by dividing the number of rooms used for your business by the total number of rooms in the house.

It is good to note that the qualification for home office deduction is determined yearly. This
means you have the option to switch between methods from year-to year based on eligibility and which option will generate a larger deduction.

While it is possible that taking the home office deduction may increase your chances of being audited by the IRS, don’t let that discourage you. You won’t want to miss out on money you may well qualify for.