Tax Deductions for Home Office: A Guide for Small Businesses
Many small businesses exclusively run out of a home office. Your home office qualifies if you use if often and exclusively for business and you have no other fixed location where you carry out the administration and management of your business, according to the IRS.
This means the coffee shop where you work occasionally doesn’t disqualify you. Nor does working outside the home on a trade. If you’re a roofer but you administer and manage your business exclusively from your home office, this still qualifies. A home office can be a separate room, or a space in your house dedicated to business.
If your home office meets these qualifications, then you may be able to write off the following items on your taxes. Deducting these expenses will help reduce your total taxable income and save you money.
The home office deduction form is Schedule C. You report business use of your home on line 30. The home office deduction limit depends on your gross income—Form 8829 will help you figure out your limit.
In this article, we’ll cover:
- Mortgage and Rent
- Sale of Your Home
- Real Estate Taxes
- Security System
- Repairs and Maintenance
- Casualty Losses
- Business Furniture and Equipment
1. Mortgage and Rent
You can’t deduct your mortgage payments. Mortgage interest and rent payments can be deducted, but only the portion that applies to your home office.
The IRS has a home office deduction worksheet that will help you calculate this (scroll to the bottom of the document).
For rent, you calculate the percentage of square footage of your home office in relation to the total square footage of your home. Then multiply that figure by the total amount of rent paid over the year.
Mortgage interest is calculated the same way. Multiply the total amount of interest paid by the percentage of your home used for business. You can also write off the interest on a second mortgage.
2. Sale of Your Home
You may be able to deduct up to $250,000 (or $500,000 if married and filing jointly) on the amount earned from selling or exchanging your home, according to the IRS. To qualify for this deduction, you must have owned the house for at least two years and lived there for at least two years within each five year block of time.
You may, however, have to report a gain for the business part of your property. You may be able to exclude the gain if you lived in the business part of your home for the last two of the previous five years.
3. Real Estate Taxes
The deductible is calculated the same way as mortgage insurance and rent—multiply the percentage of your home used for business by the total amount of real estate tax paid over the year.
4. Security System
Security systems that guard the windows and doors of your house can be deducted. You deduct just the expense to secure the business part of your home.
You can deduct any insurance, such as home insurance, but only for the business part of your house. Calculate the cost based on the square footage of your home office and the percent of space it takes up relative to the rest of the house.
If your insurance premium is longer than a year, you can deduct only the portion that applies to that tax year.
6. Repairs and Maintenance
The cost of repairs and the labor required to do them (except for your own labor) is a tax deduction, according to the IRS.
For example, a copywriter’s furnace needs repair. She uses 10 percent of her house for business. That means that 10 percent of the repair costs can be written off.
Deductible repairs include:
- Patching walls and floors
- Repairing roofs and gutters
- Repairing leaks
Permanent improvements that aren’t just a repair may not be deductible. Permanent improvements increase your home’s value, extends its life or gives it a new use. These include electric wiring or plumbing, remodeling or adding a new roof or addition.
You can write off any depreciation (decrease in value) on your home, specifically your home office, thanks to regular wear and tear.
You can deduct utilities and services such as:
- Trash removal
- Cleaning services
Multiply the cost of the utility or service in the tax year by the percentage of your home used for business. You can’t claim any part of a utility or service used for personal purposes.
8. Casualty Losses
A casualty loss is anything related to the destruction, damage or complete loss of your home thanks to unusual and sudden events such as a volcanic eruption, fire, earthquake, tornado, hurricane or flood, according to the IRS.
Casualty losses aren’t related to wear and tear of your property or graduation deterioration.
The amount you can deduct related to casualty losses are calculated based on the adjusted value of your home or its decrease in value. Or the total amount of loss, if the home is destroyed.
9. Business Furniture and Equipment
Most business furniture and equipment can’t be written off as a deductible expense. If you buy a new desk, you can’t deduct its cost.
But you can deduct the depreciation on business furniture and equipment. Items in a home office that depreciate include:
- Computer equipment
- Adding machines
- Office furniture such as desks, files and safes
Everything except for office furniture is considered a 5-year property. Office furniture is a 7-year property. Depreciation is calculated differently for the two categories. This home office tax deduction calculator will help you calculate how much you can write off.
The first telephone landline in your house cannot be deducted. But the cost of a second line and any business-related long distance charges can be expensed. Deduct this expense on line 25 of Schedule C. Internet and cell phone charges can also be expensed, but you can only deduct the percentage you use for business.
People also ask:
- Can You Write off Property Taxes?
- Can You Write off Closing Costs in 2020?
- Can You Write off Condo Fees for a Home Office?
- Can You Write off Depreciation on Your House for a Home Office?
- Can You Write off Electric Bills for a Home Office?
- Can You Write off HELOC Interest for a Home Office?
- Can You Write off Home Improvements for a Home Office?
- Can You Write off House Cleaning for a Home Office?
- Can You Write off Moving Expenses in 2020?
Can You Write off Property Taxes?
Yes, you can write off property taxes, also known as real estate taxes.
Find your allowable tax deduction by multiplying the percentage of your home used for business by the total amount of property tax paid over the tax year.
Can You Write off Closing Costs in 2020?
You can currently write off closing costs only if they’re mortgage interest or real estate taxes related to closing. Services like appraisals and title insurance can’t be written off, according to H&R Block.
For the 2020 tax year (filing in 2020), you can only claim mortgage interest on up to $750,000 worth of mortgage debt ($375,000 for married taxpayers filing separately). You can claim real estate taxes on up to $10,000 ($5000 for married taxpayers filing separately), according to Forbes.
Can You Write off Condo Fees for a Home Office?
If you own the condo and it’s your primary residence and you are required to pay condo fees, you can’t deduct these fees from your taxes.
That said, if you have a rental property and use it for personal use for part of the year, then you can deduct a portion of condo fees, according to H&R Block.
Or if you rent and are required to pay condo or other Homeowners Association (HOA) fees, you could deduct this. If the HOA is reassessed, the increased cost can be written off as depreciation.
Can You Write off Depreciation on Your House for a Home Office?
Depreciation (decrease in value) on your home thanks to regular wear and tear is a tax deduction. You can deduct only your home office’s depreciation by multiplying the percentage of your home used for business by the total depreciation.
This depreciation calculator will help you calculate how much you can write off.
Can You Write off Electric Bills for a Home Office?
Yes, you can write off electric bills for your home office. Multiply the total cost of electric bills in the tax year by the percentage of your home used for business. You can’t write off electricity used for personal purposes.
Can You Write off HELOC Interest for a Home Office?
Sometimes HELOC (home equity line of credit) interest can be written off and sometimes it can’t. And sometimes only a certain portion of the line of credit is deductible. It depends on the situation, says Forbes.
For the tax years 2018 through 2025 small businesses with home offices will not be able to deduct HELOCs. The only exception is if your loan is for building, buying or greatly improving your house. Usually, you can deduct interest paid on HELOC debt up to $100,000.
Can You Write off Home Improvements for a Home Office?
The IRS allows you to deduct the cost of repairs and maintenance and the labor required to do them (not your own labor). This includes:
- Patching walls and floors
- Repairing roofs and gutters
- Repairing leaks
Permanent improvements may not be deductible. Permanent improvements are anything that increases your home’s value, extends its life or gives it a new use. This includes remodelling, electric wiring or plumbing or adding a new roof or addition.
Can You Write off House Cleaning for a Home Office?
You can only write off house cleaning for your home office, not any part of your home used for personal purposes. Multiply the cost of house cleaning in the tax year by the percentage of your home used for business.
Can You Write off Moving Expenses in 2020?
No. The Tax Cuts and Jobs Act suspended the moving expense deduction for most Americans. Members of the Armed Forces and their spouses and dependents may be able to still deduct moving expenses.