The Home Office Tax Deduction

INSIGHTi
The Home Office Tax Deduction
September 1, 2021
The home office deduction al ows certain taxpayers to deduct expenses attributable to the business use of
their homes. In response to public health concerns surrounding the Coronavirus Disease 2019 (COVID-
19) pandemic, many workers transitioned to remote work or work-from-home arrangements, increasing
interest in this deduction. However, employees who have moved from onsite work to working from home
as a result of the pandemic are not able to claim this benefit for the work they do for their employers.
This Insight summarizes the home office deduction eligibility, calculation methods, and costs.
Eligibility
Expenses related to a taxpayer’s home general y are not tax deductible. However, some taxpayers may
deduct expenses attributable to the exclusive and regular business use of a portion of their home (26
U.S.C. §280A).
There are three main categories of business use of a home office that qualify for the deduction:
1. The home office is used as the taxpayer’s principal place of business. For taxpayers who
conduct most of their business outside the home, a home office used as the primary
location of administrative or management activities (e.g., bil ing) qualifies.
2. The home office is used to meet or serve patients, clients, or customers.
3. A separate structure not attached to the home is used for business (e.g., workshop).
The exclusive use condition requires that an area of the home be used only for business and never for
personal uses, by the taxpayer or anyone in the taxpayer’s family. For example, a room would general y
fail the exclusive use test if the taxpayer’s child uses it to do homework, even if the taxpayer only uses it
for business. There are limited exceptions to the exclusive use condition for wholesale or retail sel ers and
licensed day care operators.
Can Employees Claim a Home Office Deduction?
Employees are currently ineligible to claim the home office deduction for work they do for their
employers. Before 2018, in some cases employees could deduct the business use of their home as a
miscel aneous itemized deduction. (This benefit was unavailable to taxpayers who claimed the standard
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deduction.) Under this provision, the home office had to be for the convenience of the employer (not the
employee’s preference). In addition, the amount that could be deducted had to exceed 2% of adjusted
gross income (AGI), a floor applicable to miscel aneous itemized deductions general y. P.L. 115-97 (often
cal ed the “Tax Cuts and Jobs Act”) suspended al miscel aneous itemized deductions for tax years 2018
through 2025. Under current law, certain employees who itemize their deductions may be able to claim
this benefit beginning in 2026.
At least one legislative proposal in the 117th Congress would extend the deduction to employees for home
office expenses during the COVID-19 pandemic.
Calculating the Deduction
There are two methods for determining the amount of the deduction: the actual expense method and the
simplified method.
Actual Expense Method
The actual expense method requires a taxpayer to keep detailed records in order to calculate the deduction
amount (and to substantiate their claim, if requested to do so). General y, deductibility varies by the
portion of business use and whether the taxpayer itemizes deductions for individual income taxes.
Deductible expenses are either direct or indirect. Direct expenses are due only to the business use of the
home, such as a wal repair in the home office. The full amount of direct expenses can be deducted.
Whereas home office repairs are general y deductible, permanent improvements cannot be deducted. The
IRS considers repairs to be actions that keep a house in good working order, whereas permanent
improvements permanently increase the value. Repainting a home office would most likely be a repair,
whereas building a wal to create a room for business would most likely be a permanent improvement.
Indirect expenses are expenses for the whole home that also benefit the business. These include utilities
such as electricity, as wel as certain personal itemized deductions, such as mortgage interest. The
taxpayer must al ocate these expenses between personal and business use and can only deduct the
business portion. The IRS al ows any reasonable method to determine the percentage used for business.
One common method is dividing the area used for business by the area of the whole home.
The home office deduction cannot exceed the gross income of a business in a given year. The amount of
the deduction that would exceed gross income may general y be carried over to the following year.
Simplified Expense Method
The IRS recognized that the documentation and calculation requirements of the standard method were
burdensome for some smal businesses. In 2013, it created an optional safe harbor to determine the
amount of deductible expenses for business use of a residence (Rev. Proc. 2013-13). The simplified
method deduction is $5 times the physical area used exclusively for business, up to a maximum of 300
square feet. The maximum deduction is $1,500 or the gross income of the business, whichever is less.
Excess home office expenses under the simplified method cannot be carried over to the following year.
Cost and Equity
In tax year 2018, $10.6 bil ion was deducted by nonfarm sole proprietorships for home office expenses.
(A sole proprietorship is an unincorporated business owned by the taxpayer only.) This is 0.9% of the $1.2
tril ion of al sole proprietor business deductions.

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The benefits of the home office deduction are more likely to go to businesses with lower business receipts
(see Figure 1). In tax year 2018, about 70% of the home office deduction dollars went to businesses with
annual receipts of less than $100,000. Those same businesses received 24% of al business deductions.
The largest sole proprietorships, with receipts of $1 mil ion or more, claimed 36% of al business
deductions but 1% of home office deductions.
Figure 1. Distribution of Dollars Deducted in Total and Under the Home Office Deductions
Among Sole Proprietors, by Business Receipts, 2018

Source: Figure created by CRS using data from Table 2, IRS Statistics of Income Bul etin, “Sole Proprietorship Returns,
Tax Year 2018,” Spring 2021, available at https://www.irs.gov/pub/irs-soi/soi-a-insp-id2104.pdf.
Author Information
Anthony A. Cilluffo

Analyst in Public Finance



Disclaimer
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