What to know about the home office deduction

If you’re self-employed and work from home, you may be able to claim the home office deduction to help lower your federal income tax bill. But if you’re an employee who works at home, tax reform may have put a wrinkle in your dreams of a home office tax deduction.

While tax reform didn’t directly change the home office deduction, it did temporarily suspend miscellaneous itemized deductions that were claimed on Schedule A. And among those suspended items were unreimbursed employee expenses, including the home office deduction.

That means if you work from home as an employee for someone else, you can’t take the home office deduction for tax years between Jan. 1, 2018, and Dec. 31, 2025.

But if you’re self-employed (a small-business owner, freelancer or rideshare driver, for example) you may still be able to claim the deduction. But you’ll have to meet qualifying criteria. Let’s look at what they are.

• What is the home office deduction?
• Who can take the home office deduction?
• Who can’t claim the home office deduction?
• Calculating your home office deduction
• Steps to take if you lost the home office deduction

What is the home office deduction?

The home office deduction is a federal income tax deduction that allows qualifying taxpayers to deduct certain expenses related to the business use of their homes. And it isn’t limited to homeowners — it’s also available to renters, whether they live in a single-family home, apartment, condo or another type of home.

Some examples of the types of expenses you might be able to deduct include …

• Insurance
• Utilities
• General repairs
• Security systems
• Telephone
• Part of your rent (if you rent your home)

Who can take the home office deduction?

Not every self-employed person with a home office will qualify for the home office deduction. There are two basic requirements to qualify.

1. Regular and exclusive use — You use your home office exclusively and regularly for business. For example, if you’re a rideshare driver who uses your dining room table for business-related weekly paperwork and family meals, you probably can’t take a deduction for that room. However, if you turn your dining room into a home office and use it every day to do business you might qualify for the home office deduction.
2. Principal place of your business — Your home office should be your principal place of business. To determine if your home is your principal place of business, the IRS says you must consider the importance of the business activities you’re conducting there, as well as how much time you spend there and at any other place where you conduct business. There are some circumstances when your home office could qualify for the deduction, even if you also do business outside your home. Check out IRS Publication 587 for all the rules.

Who can’t claim the home office deduction?

Prior to tax reform, the rules for the home office deduction applied to both self-employed people and employees who had a home office for the convenience of their employers.

But starting with the 2018 tax year, the Tax Cuts and Jobs Act suspended miscellaneous deductions subject to the 2% floor, including unreimbursed employee business expenses, and thus, the home office deduction for employees. So while self-employed people may still be able to take advantage of this tax perk, taxpayers who are employed by someone else are out of luck.

Likewise, if you’re self-employed and use part of your home for business but don’t meet qualifying requirements, you wouldn’t be able to take the home office deduction either.

Calculating your home office deduction

You can calculate a home office deduction in two ways.

1. The simplified option

The simplified option gives taxpayers a deduction of $5 per square foot of the home used exclusively and regularly for business, up to a maximum of 300 square feet. So if you have a 200-square-foot home office that you use exclusively and regularly for business, your home office deduction would be $1,000 (200 sq. feet x $5).

2. The regular method

With the regular method, you calculate your home office deduction by adding up the total actual expenses of maintaining your home office for the year and multiplying it by the percentage of your home’s square footage used for business.

Say your home is 1,500 square feet in total, with 150 square feet (10%) used as your home office. Assuming the following costs to maintain your home, here’s what your home office deduction would be:

You can use either the simplified method or the regular method each year, whichever gives you a higher deduction when you file your federal income tax return.

However, whichever method you choose for calculating your home office deduction, your deduction can’t be more than the gross income you earned from the business use of your home reduced by your business expenses. That means if your home office deduction adds up to $1,000, but your gross income from using your home office for business was only $900, and you had business expenses of $300, you would only be able to deduct up to $600 for your home office.

What’s the criteria for deducting a business expense?

To be deductible, the IRS says, a business expense must be ordinary and necessary. An ordinary expense is one that’s common and accepted in your field of business or trade. A necessary expense is the cost of something that’s helpful and appropriate for your trade or business.

Steps to take if you lost the home office deduction

Under the new rules, many telecommuting employees will lose a valuable tax break. If you’re one of them, you could talk to your employer about setting up an accountable plan to help offset the loss of the home office deduction.

An accountable plan is a method for reimbursing employees’ out-of-pocket business expenses.

The IRS outlines its requirements for setting up an accountable plan in Publication 463. In general, the reimbursement arrangement must include all the following rules:

• Reimbursable expenses must have a business connection.
• The employee must adequately account to the employer for these expenses within a reasonable period of time. The definition of “reasonable period of time” depends on the situation. This could mean submitting an expense report and copies of receipts within 60 days after incurring the expense.
• If your employer reimburses you too much for any expense, the excess reimbursements must be returned to your employer within a reasonable period of time.

If your employer reimburses you for business-related expenses, but their plan doesn’t meet the above requirements, it’s considered a nonaccountable plan. In that case, you’ll have to include payments you receive through the plan as income, and the amount should be included in the wages on your W-2.

Bottom line

If you’re self-employed and have a home office, look into the home office deduction to see whether you can deduct some of the costs of maintaining your home and save money on your federal taxes. Just make sure your home office meets IRS requirements and keep careful records to substantiate your deduction.

Employees with home offices aren’t as fortunate — at least for the next few years. But even if your employer isn’t excited about the idea of establishing an accountable plan to reimburse you for your home office expenses, there’s hope on the horizon. Like many provisions of the Tax Cuts and Jobs Act, the suspension of miscellaneous itemized deductions is due to expire at the end of 2025. If you really like working from home, the wait just might be worth it.

A senior product specialist with Credit Karma, Janet Murphy is a CPA with more than a decade in the tax industry. She’s worked as a tax analyst, tax product development manager and tax accountant. She has accounting degrees and certifications from Clemson University and the U.S. Career Institute. You can find her on LinkedIn.