Home office deduction

Since the spring, taxpayers across the country have turned kitchens, living rooms, bedrooms or other rooms of their homes into temporary offices. With so many people currently working from home and the likelihood that this could continue for the foreseeable future, a reasonable question becomes whether a home office deduction is now available. This article will address the requirements to take this deduction on a tax return.

Business use of home

In general, certain taxpayers can deduct business expenses related to their personal residence for space used exclusively and regularly in connection with a trade or business. Self-employed taxpayers or individual partners in partnerships can qualify. Employees working from a home office are no longer eligible to take a home office deduction. This itemized deduction was suspended from 2018 through 2025 to help “pay for” the doubling of the standard deduction under the Tax Cuts and Jobs Act (TCJA).

Eligibility for a home office deduction is created if the space is exclusively used (and is the principal location) to meet with patients, clients or customers in the normal course of business, or is where management or administrative functions (such as billing, maintaining books and records, ordering supplies, scheduling appointments, etc.) are performed. Occasional duties conducted at other locations, including hotels and customer sites, will not necessarily preclude the taxpayer from qualifying for a home office deduction. There are special rules for daycare providers not discussed in this article.

Once it is determined the taxpayer can take a home office deduction, certain expenses of the home are divided between personal and business use. Personal expenses cannot be used in this computation. Costs directly associated with the trade or business, such as painting or repairs of the business space, would be deductible in full as a home office expense. Indirect expenses, including homeowners insurance, rent (if the taxpayer does not own the home) and utilities, are allocated to the home office using the percentage of the home being used for business (typically determined through a square-footage allocation). The same percentage of mortgage interest and real estate taxes would be deducted as part of the home office deduction instead of an itemized deduction on Schedule A.

Homeowners can also depreciate (accounting for the wear and tear of the structure but not the land) the business portion of their home. Permanent improvements made to the home office can be depreciated as well. However, depreciation of the home office has to be recaptured as ordinary income once the home is sold. In other words, the cumulative amount of depreciation deducted is not eligible for the primary residence sale exclusion.