Basics of the Home Office Deduction Limit

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If you run your business from home, you may be able to get some tax benefits. Home office deductions are subject to certain limitations. Here are the basics of the home office deduction limit and how your income and expenses play a role.

Key Takeaways

  • Certain business owners who primarily use their homes or a part of their homes to run their business may be eligible to claim home office deductions
  • Home office deductions are not available to employees
  • You can only claim deduction for business expenses, and not any other home-related personal expenses

What Is a Home Office Deduction

Home offices are very common. If you use one to run your business, you may be able to take certain deductions on your taxes. However, you need to meet certain eligibility criteria and may be subject to a limit on how much you can deduct.

Note

The Tax Cuts and Jobs Act eliminated home office deductions for any W-2 employees starting 2018, through 2025.

In order to claim a home office deduction, you need to meet at least one of the following conditions:

  1. Your home is your exclusive and regular place of business
  2. Your home is where you exclusively and regularly meet patients, clients or customers, basically, anyone you'd need to meet in the regular course of your business
  3. There's a separate structure that's not a part of your home (think a shed) that's used as an exclusive of regular place of business
  4. You use your home to regularly store inventory that you retail or wholesale
  5. You use your home for rental purposes
  6. You run a daycare facility out of your home

What Expenses Can You Deduct?

The IRS allows businesses to deduct expenses that are ordinary and necessary to their operation. It follows a similar methodology for home office deductions. But remember, you can only deduct business expenses and not personal expenses, so while you share the premises, you will have to account for business expenses separately.

Note

Any expenses for maintenance or repair or other aspects of your home, such as landscaping, that do not pertain directly to your home office, are not eligible for home office deduction.

Most expenses incurred during the operation of your business may qualify for the home office deduction. Qualified expenses may include the business portion of your mortgage, insurance, depreciation, mortgage interest and maintenance.

Steps to Determine Your Home Office Deduction

There are two ways a business owner can claim the home office deduction — the regular method and the simplified option.

Regular Method for Home Office Deduction

Under the regular method, you'd compute your home office deduction by computing the percentage of the expenses that go towards business use. You could use IRS Form 8829 to make that calculation.

There is a step by step process to determine how much you are able to deduct on your taxes for your home office. The following steps can help you determine the number:

  1. Determine the percentage of your home that your home office taxes up. For example, if there are ten rooms in your home and your home office takes up one room, you may determine that your home office takes up 10% of your home.
  2. Start with your business's gross income for the year.
  3. You then subtract expenses you would deduct even if you didn’t have a home office. This can include mortgage interest, real estate taxes, and casualty and theft losses. You will only subtract the percentage for your home office. So if your home office takes up 10% of your home, then you can only deduct 10% of each expense.
  4. Now you subtract expenses related to your business activity from your business's gross income. This can include a second phone line, office supplies, and depreciation on equipment. You can subtract 100% of these expenses.
  5. This will give you your deduction limit.
  6. Once you have determined your deduction limit, you can then deduct any other applicable business expenses. This could include maintenance, insurance, utilities, and depreciation. You need to deduct depreciation last. Again, you can only deduct the home office percentage of these expenses, such as 10% from our example above.
  7. If your expenses are more than your deduction limit, you are able to carry over the remaining expenses to the next tax year. Keep in mind, anything you carry over will be subject to next year’s deduction limit.

Exception for Day Cares Using Regular Method

If you run a daycare facility and the lines of business and personal use of your home are a little fuzzy the IRS has an exception for you. You can determine your home office deduction by computing what percent of your home is used exclusively for business and what percent is used for business part-time and takes the sum of those figures to compute the deduction amount.

Simplified Option Method for Home Office Deduction

This method offers an option to business owners to compute their home office deduction by using a simple calculation, rather than the regular complicated one. Under this method, business owners can claim $5 deduction per square foot for the business use of their home, subject to a maximum of 300 sq. ft.

Example of Regular Home Office Deduction Calculation

The following is an example of how to use your income and expenses to determine your home office deduction allowed in a tax year.

Your Gross Business Income is $10,000.
Your total home office expenses are $12,000.
You are therefore subject to a deduction limit because your expenses are more than your income.

Gross Business Income........................................................................$10,000

Minus

Home Expenses (Real estate taxes, etc.) 10%.....................................$6,000

Minus

Business Activity Expenses (Second phone line, etc.) 100%...............$2,000

Equals

Maximum Deduction ..........................................................................................$2,000

Your maximum allowed deduction is $2000, but you have $4000 in home office expenses that you still want to deduct. You can therefore only deduct up to the $2000 deduction limit and will have to carry over $2000 ($4000-$2000) to the next tax year.

Deduction Limit.......................................................................................$2,000

Minus

Additional Home Office Business Expenses (Utilities, etc.) 10%................$1,800

Minus

Depreciation Allowed ($2200 allowable, but can only deduct $200 this tax year because of the deduction limit)....................................................................$200

Equals

.......................................................................................$0

Depreciation Carryover to the Following Tax Year ($2200-$200)................$2000

Frequently Asked Questions (FAQs)

How do you calculate home office deduction?

A business owner can calculate home office deduction using two methods— regular and simplified option. Under the regular method, you'd use Form 8829 to determine your deduction using figures for the area of your home and total hours it was used for business purposes, your business income and other business expenses. Under the simplified option, you can claim $5 per sq. ft. of your home used for business up to a maximum of 300 sq. ft. There are different rules for business owners who run daycare facilities.

What are IRS rules for home office deduction?

According to the IRS, business owners who meet certain criteria may be eligible for home office deductions. In order to claim the deduction business owners must use a part of their home as the exclusive and regular place for business, a place where they meet clients, a place where they store inventory, or a place where they run a daycare facility. Home office deductions are not available to employees.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "IRS reminds taxpayers of the home office deduction rules during Small Business Week."

  2. Internal Revenue Service. "Instructions for Form 8829 (2021)."

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