Home office deductions for the self-employed

For the self-employed, home offices can be written off on taxes for a sizable deduction. However, the task comes with a set of stringent conditions after the tax law changed in 2017.

Here is what you need to know to obtain a home office deduction, according to tax experts.

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Home Office Deduction Conditions

“The home office deduction can only be taken by businesses and those that are self-employed,” said Mike Savage, the CEO and founder of 1-800-Accountant. “The only way employees may be able to take a ‘deduction’ is to get reimbursed by their employer through an accountable plan, but not many employers do this.”

“The employee cannot take the deduction, but the employer can on their return with an accountable plan,” he added. “To qualify, the home office must be used ‘exclusively and regularly as your principal place of business.’"

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In other words, the written-off home office should be located in a defined area of a house and is used only for trade or business purposes, which are done on a daily basis. Failing to meet these requirements can void the writeoff.

Placing a laptop on a living room table is not enough to qualify nor would a specialty computer chair that can be used as s furniture.

"If, for example, the desk and computer used for the home office is also used by other members of the family for other purposes – such as games, email, and surfing the internet – the deduction would not be allowed,” shared Dave Du Val, the vice president of customer advocacy at TaxAudit. “There are some exceptions to these rules, such as for daycare facilities. Keep in mind that some states still allow the deduction on the state returns."

Home Office Deduction Calculations

Home offices that qualify for a tax deduction can be prorated for some household expenses like utilities, rent or mortgage interest, property taxes, repairs and so on for Schedule C (Form 1040), according to Morris Armstrong, the founder and owner of tax preparation and representation service Morris Armstrong EA LLC.

To claim a home office deduction, taxpayers will need to fill out Form 8829.

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“The calculation is workspace divided by the size of the house. If you have a 100-square-foot work area and your home is 2000 square feet, then you are using five percent of the house. Hence five percent of the expenses may be applied against the income earned as a self-employed person,” Armstrong explained. “Other expenses such as furniture may be written off. If you need a desk, chair, TV, computer, usual and customary furnishings, you are entitled to write them off in the year placed in service.”

Home Office Deduction Depreciation

Additionally, taxpayers have the option to expense their home office purchases in full or choose to depreciate them over time.

“Most people will opt to write off the one thousand dollar desk in the first year as opposed to depreciating it over five years,” Armstrong said. “These would likely show up on Schedule C directly under overhead or flow to the C if listed on a depreciation schedule showing the full write off.”

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However, if a taxpayer claims a depreciation deduction on a portion of the house where their home office is, TaxAudit Vice President of Customer Advocacy Dave Du Val says there are considerations that need to be taken into account.

“You will need to reduce your basis in your home by the amount of the deduction you claim and then recapture that amount when you sell the home, which could increase your tax bill at that time,” he warned.

Du Val added, “To avoid this situation, however, you can take advantage of the simplified option for the home office deduction which does not include a depreciation deduction or depreciation recapture upon the sale of the home."

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