Maximizing Your Home Office Business Deduction

As of late 2024, employ­ees gen­er­al­ly can’t expense (write off) work relat­ed expens­es and cost near­ly to the lev­el of busi­ness own­ers.  Some excep­tions do apply, includ­ing if the use of a home office is for the con­ve­nience of the employ­er.

Sad­ly, many busi­ness own­ers don’t take advan­tage of deduct­ing their cost of hav­ing a home office, much less max­i­miz­ing the legit­i­mate and rea­son­able bills they have to pay to main­tain their busi­ness home office.

Here, I will dis­cuss and list items you will want to con­sid­er if it applies to your sit­u­a­tion. I would also be incom­plete if I did­n’t start out with the fact there is a LOT of mis­in­for­ma­tion out there and much of it will lead one into trou­ble, so know your source, know who is pro­vid­ing any giv­en advice, and espe­cial­ly, know if you can hold them account­able for their advice to you.

If you can’t hold them account­able to you for any finan­cial loss, then you SHOULD NOT make finan­cial deci­sions, includ­ing the fil­ing of a tax return based on the infor­ma­tion.

Some of the infor­ma­tion will be based on a few key laws and reg­u­la­tions in what’s known (in part) as The Inter­nal Rev­enue Code (IRC).

These include:

IRC Sec­tion 280A: Use of your home for a busi­ness pur­pose. Some points of inter­est and com­pli­ance include the deduc­tion of expens­es is allowed only if the home office is used exclu­sive­ly and reg­u­lar­ly for busi­ness pur­pos­es (reg­u­lar­ly is some­what ambigu­ous, albeit there’s case law that pro­vides guid­ance)

IRC Sec­tion 162 and 212: The expens­es must be relat­ed to a trade or busi­ness that helps it make a prof­it. The stan­dard the IRS gen­er­al­ly uses is the “ordi­nary and nec­es­sary expens­es” paid by the trade or busi­ness. A point that I see come up from time to time by tax pre­par­ers giv­ing erro­neous advice is some believe this means the expense must be the cheap­est pos­si­ble cost.

To be sure (and the IRS has all sorts of infor­ma­tion and rules regard­ing exces­sive expens­es), ordi­nary and nec­es­sary does and does not mean what it sounds like to most peo­ple.

The best thing I can add as a gen­er­al state­ment is often the crowd will have it right. Mean­ing, if oth­ers in your indus­try are spend­ing mon­ey on any giv­en expense, it’s a good sign (albeit not deter­mi­na­tive) that you’re like­ly able to take the same expense.

This becomes even more the case when the busi­ness can show a direct rela­tion with a giv­en expense and the pro­duc­tion of income. That said, some­times what would oth­er­wise eas­i­ly qual­i­fy as an ordi­nary and nec­es­sary expense is by statute not allowed, or not allowed in full.

A busi­ness lunch is gen­er­al­ly only able to take 50% of the actu­al expense as a deduc­tion. Enter­tain­ment, includ­ing golf out­ings and sports tick­ets are no longer allowed (as of this writ­ing). So, hav­ing a pro­fes­sion­al advise you is key. 

IRC Sec­tion 168 and 179: If an expense needs to be depre­ci­at­ed over sev­er­al years, the expense may also qual­i­fy for accel­er­a­tion of depre­ci­a­tion, allow­ing the tax­pay­er to take a larg­er amount of expense ear­li­er instead of a flat amount each year.

The tax­pay­er gen­er­al­ly has sev­er­al ways to reduce the tax bur­den with a home office. These include:

Sim­pli­fied Method — Basi­cal­ly, the tax­pay­er is able to take the square footage of the office, and mul­ti­ply that by $5 to arrive at a total deductible expense. For exam­ple, if you have a 200 square foot office, you would take 200*$5 and you have $1000 for your expense. Some of the advan­tages of this method is the tax­pay­er does­n’t have to depre­ci­ate the prop­er­ty (assum­ing the office is owned by the tax­pay­er). Depre­ci­a­tion is gen­er­al­ly recov­ered by the IRS upon the sale of the prop­er­ty, so not hav­ing to deal with cost recov­ery is an advan­tage to many. Obvi­ous­ly track­ing of expens­es isn’t required nei­ther, mak­ing the sim­pli­fied method, sim­ple. Some­times, it’s even high­er than the actu­al expens­es, mak­ing it ide­al for those who may oth­er­wise have a low­er amount to deduct. This is espe­cial­ly true for many who rent their home or apart­ment.

Actu­al Expense Method — There are two ways to man­age this. First, and often the wrong way, is to deduct it from your per­son­al income tax. Because this is so often the wrong way, I won’t spend much time with it. The oth­er strat­e­gy is for your busi­ness to expense (and poten­tial­ly, depend­ing on your enti­ty type) reim­burse you for the expense.

This is pre­ferred because your busi­ness can take the amount paid and reduce the income, which is often sub­ject to self-employ­ment and oth­er tax­es. when you’re reim­bursed for the expens­es, you don’t report it as income on your per­son­al return, albeit the busi­ness still expens­es the cost. This is gen­er­al­ly part of an account­able plan that has many rules that must be fol­lowed.

Anoth­er advan­tage is akin to the sim­pli­fied method, there’s no depre­ci­a­tion cost recov­ery, so it’s the best of both worlds when it’s appro­pri­ate. as stat­ed ear­li­er, the actu­al expense method for a home office is usu­al­ly the best option because most tax­pay­er busi­ness own­ers with a home office will have over $5 per square foot in cost, mak­ing the actu­al expense method the way to go.

I can’t stress this enough, doc­u­men­ta­tion and record­keep­ing are vital to being able to sub­stan­ti­ate your expens­es. So many busi­ness own­ers want to esti­mate the costs off the top of their head and it’s a very cost­ly mis­take. Have your book­keep­er main­tain the records through­out the year so you’re not scram­bling to find all the invoic­es you “know are there some­where.”

In no par­tic­u­lar order here are items to con­sid­er as they may or may not apply to your home office. The way you cal­cu­late how much is applic­a­ble to your busi­ness isn’t as straight­for­ward as you may imag­ine (noth­ing is when it comes to tax­es). You have the per­cent­age allo­cat­ed and the room method as poten­tial meth­ods.

You may also have anoth­er struc­ture on your prop­er­ty that you con­vert­ed into an office. The room method is often the best way for many tax­pay­ers because the method assigns a greater amount of your home to the home office because it essen­tial­ly (and this is an over­sim­pli­fi­ca­tion) removes the hall­ways and com­mon areas from the cal­cu­la­tion, leav­ing a greater amount of office rel­a­tive to the rest of the house. It’s appro­pri­ate too because after all, one must use the hall­way to gain access to any giv­en room in a home, regard­less if it’s an office or oth­er­wise.

Items that gen­er­al­ly make up the home office expense include:

• Real estate tax­es
• Mort­gage inter­est
• Rent (if rent­ing the home)
• Home­own­er’s insur­ance /Renter’s insur­ance
• Home­own­ers’ asso­ci­a­tion fees (HOA)
• Util­i­ties (elec­tric­i­ty)
• Gas (for heat­ing)
• Water
• Sew­er fees
• Trash col­lec­tion
• Recy­cling fees
• Inter­net ser­vice
• Land­line phone ser­vice (if sep­a­rate for busi­ness)
• Cell phone ser­vice (if used for busi­ness)
• Cable or satel­lite TV (if required for busi­ness, and gen­er­al­ly must be required to gen­er­ate a direct prof­it)
• Secu­ri­ty sys­tem costs
• Main­te­nance and repairs (gen­er­al)
• Repairs spe­cif­ic to the home office
• Pest con­trol
• Lawn care and land­scap­ing (although not every­thing that tax­pay­ers want may qual­i­fy)
• Snow removal
• Pool main­te­nance (if applic­a­ble)
• Win­dow clean­ing
• Gut­ter clean­ing
• HVAC main­te­nance
• Roof repairs
• Plumb­ing repairs
• Elec­tri­cal repairs
• Home improve­ment expens­es (direct­ly ben­e­fit­ing the office)
• Paint­ing (both inte­ri­or and exte­ri­or. Some impor­tant lim­i­ta­tions though. For exam­ple, if you want to paint a kid’s room because they now like a cer­tain col­or, that’s not going to count)
• Floor­ing replace­ment or repairs
• Depre­ci­a­tion on the home office (39 year depre­ci­a­tion sched­ule as it’s busi­ness space)
• Depre­ci­a­tion on home office fur­nish­ings
• Depre­ci­a­tion on office equip­ment
• Home office fur­ni­ture (desk, chair, fil­ing cab­i­nets)
• Win­dow cov­er­ings (blinds, cur­tains for the office)
• Office light­ing fix­tures
• Office dec­o­ra­tions (framed art­work, plants)
• Office shelv­ing
• Office stor­age solu­tions
• HVAC replace­ment (if need­ed)
• Water heater repairs/replacement
• Chim­ney clean­ing and repairs
• Ter­mite con­trol and inspec­tions
• Fire extin­guish­er and fire safe­ty equip­ment for home office
• Water fil­tra­tion sys­tems (if used in home office)
• Busi­ness insur­ance cov­er­ing home office
• Fire or flood insur­ance (if applic­a­ble)
• Office clean­ing ser­vices
• Office ren­o­va­tion costs
• Replace­ment of bro­ken win­dows or doors
• Foun­da­tion repairs
• Bath­room sup­plies
• Salt for water soft­en­er
• Exte­ri­or home repairs (sid­ing, paint, etc.)
• Snacks and drinks (if used exclu­sive­ly for the home office. So you can’t stock the home office with drinks and invite the kids to help them­selves)