Table with a tax advisor helping a small business owner understand taxes sitting in an office
Business Tax, Tax Planning

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 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.

  • 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)