Your Home Office Is Probably Not Deductible

More and more of us have some kind of home office, but a home office is only deductible in certain situations.

Even before the widespread proliferation of work-from-home arrangements over the past few years, many folks maintained a home office where they worked some or all of the time for their main jobs and/or self-employment.  Every year I have several clients who ask whether they can deduct their home office.  Usually the answer is no.  

The Tax Cuts and Jobs Act of 2017 (colloquially known as the “Trump Tax Cuts”) made significant changes to the United States federal tax code.  One change that impacted millions of taxpayers was the removal of unreimbursed employee expenses from the list of available itemized deductions.  Before 2018, folks who incurred expenses on the job for which they were not reimbursed could include those expenses among their itemized deductions.  This was especially popular for long-haul truckers (meals and lodging), teachers (classroom supplies), and anyone else that paid job-related expenses out of pocket such as supplies, continuing education, mileage, or use of a home office.  Starting with the 2018 tax year, though, these job-related  expenses were no longer deductible.  

However, self-employed taxpayers remained (and still remain!) eligible to claim any legitimate business expenses against their business income.  This includes a home office, otherwise known as the “business use of home” deduction.  

There are three tricky requirements for the home office deduction that cause issues:  specific area, regular use, exclusive use.  (Other requirements also apply, such as the home office being your principal place of business, but those are usually straightforward.)

Specific area

You must be able to identify the specific area of your home that is used for business purposes.  If you have a separate room, this is a no-brainer.  But if you use only part of a room, it needs to be clear.  A loosely-defined corner of the room will probably not suffice.  

A long time ago, I had a client under audit by the IRS where the IRS agent visited his home to verify his home office deduction.  His office area was not in a separate room, but it was separated from the living and dining areas by a half-wall establishing an easily identifiable barrier.  Because he claimed only the square footage of the separate area, the deduction was sustained in full after verifying the remaining requirements.  

You do not need a permanent partition like my former client had, but you must nevertheless be able to identify the specific area you are claiming as your home office.  If you have a room with your desk and office supplies on one side of the room and a couch that turns into a guest bed on the other side like we do, make sure to only include the office side as the specific area.    

Regular use

The regular-use requirement for a home office is also usually fairly easy to meet, but it is important enough that it bears mentioning here.  

You must use the specific area of your home that you are claiming as a home office on a “regular” basis for your trade or business.  Use for other purposes, such as a hobby, does not qualify.  (More on that below!)  Using your home office on a daily basis for business purposes is not required, but occasional, incidental, or sporadic use is not enough.  

If your home office is your bona fide “headquarters,” though—which the IRS calls your “principal place of business”—you will have no trouble meeting this requirement.  

• You can have several business locations, but your home office must be your principal location for you to be able to claim the deduction.  Most of my self-employed clients work from only one location, though, so this is rarely an issue.  

Exclusive use

The exclusive-use test is where most folks typically fail to qualify for the home-office deduction.  

To meet the exclusive-use test, you must use your home office specific area discussed above only for your trade or business.  You cannot use your home office for both business and personal purposes, even if those uses are at different times.  For example, you might use your home office during the day solely for your trade or business, but using that same space as a family movie theater in the evenings or a guest room when you have visitors in town is disqualifying personal use.  

The most common scenario I encounter is someone who has a W-2 day job where they regularly work from their home office, and also a side hustle that they conduct solely out of that same home office.  

• They easily meet the specific-area test because their home office is a separate room.

• Their side hustle qualifies as a trade or business, not just a hobby.  They easily meet the regular-use test for their side hustle because their home office is their only business location, and thus their principal place of business (i.e., headquarters).  

• They fail the exclusive-use test because they also use their home office for personal purposes.  Even though it feels like “business,” working at your W-2 job is considered personal use since it is not work conducted for your business.  

You can conduct more than one trade or business out of your home office as long as you do not use the same space for personal purposes at any point during the year.  You would then simply apportion the home office deduction accordingly.  

If you meet the requirements to claim a deduction for your home office space, you can deduct an allocable portion of your expenses that relate to the entire home, such as utilities, insurance, and repairs.  (These would otherwise be nondeductible personal expenses.)  You can also claim, in full, any expenses that directly relate to the home office itself because those are business expenses rather than home expenses.  

I would love it if everyone who worked from home—employees and self-employed persons alike—could claim a home-office deduction.  Unfortunately our tax code no longer agrees.