A growing number of employees are making a claim to work from their home office. Many employers are willing to facilitate flexible working rights for their employees to create the conditions for a better work-life balance. But do home office rights exist, or is there even a law governing work from home?
Whether you’re a teacher, writer or a field worker – many professions require at least some work to be done from the employee’s home, while certain occupational groups now work entirely remotely. To create the perfect atmosphere for focused working, it’s worth setting up a dedicated room as a home office. In some cases, it’s even possible to claim expenses for working from home, furniture, and office equipment. We’ll show you what to look out for when considering tax relief when working from your home office.
Who’s allowed to tax-deduct a room as a home office?
Not every professional will be able to claim relief for a dedicated home office or work equipment to lower their taxes. Whether you can deduct a home office depends, in the first instance, on whether you’re employed or self-employed. The US regulations that govern who and what can and can’t be tax-deducted are stipulated by the IRS in Publication 587, which clearly stipulate that employees can no longer claim any tax relief for a home office. Only the self-employed or partnerships are able to claim back some of the expenses when working from home.
You’ll qualify as self-employed when you’re working for yourself or have set-up a small business. This may include working freelance, providing services as an independent contractor, being a partner in a business or working for yourself part-time or on the side.
When is working from home considered tax-deductible?
To claim expenses on a work room in your home, some requirements need to be met. Not every space that comes equipped with a desk automatically qualifies for tax relief. However, the IRS generally offers a tax deduction of $5 per square foot of a home used solely for business purposes. There are, however, some requirements that have to be met:
- You must be using your home office regularly and exclusively for business purposes. That means if you’re using the family dining table to conduct your work in the mornings or evenings, you cannot claim a tax deduction. The desk area would have to be used solely for business in order to qualify. If, for example, you regularly meet and greet clients in a separate room, this would be suitable as a write-off.
- Storage, daycare facilities, and separate structures all typically qualify for tax relief as long as they are used solely for business purposes.
- The home office must be your principle place of business. That means, if you tend to work away from your home office and only rarely use it to fill in some paperwork, you may not be able to claim expenses on the room.
If you’re renting an office room or a co-working space outside of your home, you can fully tax-deduct the costs for the space as a business expense. However, your home office would not qualify for an additional or separate allowable relief.
Working from home: What am I allowed to write off?
In order to write off the costs of working from home, you should know which types of expenses you can deduct. Among the costs you can tax-deduct are:
- Utility bills (gas, electric, water)
- Home contents and buildings insurance
- Telephone, internet, and cell phone bills
- Part of your rent or mortgage
- Security costs
- Repair costs
- Office equipment
- Office furniture
The IRS generally distinguishes between direct expenses – items or services that are used solely for business purposes; indirect expenses that include items and services only partially used for business; and unrelated expenses that cannot be deducted.
Examples of direct expenses include rooms only used for work, painting or maintenance costs of the home office, office equipment or a dedicated business mobile phone. Indirect expenses include insurance and utility bills because when you work from home you’ll be using only a percentage of your water, heating, and electricity for your home office. Unrelated expenses are not deductible and would include maintenance jobs of unrelated home structures, e.g. cleaning the gutters or painting a fence.
Expenses paid to set-up a home office can be deducted retrospectively.
How to write off your rent or mortgage?
Whilst expenses for furniture or office equipment such as a computer can be fully tax-deducted, rent and mortgages can only be partially written off. There are generally two options used to calculate how much taxpayers can deduct.
Example 1: $5 per square foot
One of the simplest options is to calculate how many square feet of space are dedicated for sole business use. The IRS offers a tax relief of $5 per square foot up to a maximum of 300 square feet. In a 250 square feet space this would be calculated as follows:
250 square feet x $5 = $1,250
Hence, $1,250 could be written off as a business expense towards your home office.
Example 2: total expenses
The second option includes all other expenses such as repair costs and utility bills.
Let’s assume the space of your home is 1,000 square feet in total and you use 100 square feet (10%) of it as your home office. You would be able to write off 10% of all expenses as follows:
|Expense type||Cost||% of home office||Allowable deductible expense|
|Total: $150||Total: $150||Total: $150||Total: $150|
According to the calculation above, you would be able to write off $150 in total per month working from home. Generally, you cannot deduct more than your gross income was. So, if your yearly expenses were $1,500, but you only earned $1,000, you cannot claim the full expense amount.
A well-equipped home office should include the Microsoft Office Suite. IONOS provides Microsoft Office including OneDrive and Microsoft Teams – the optimal solution for businesses and sole traders. The tools allow you to collaborate with others via the cloud. Costs for Microsoft Office can be deducted as a business expense.
How to deduct expenses when working from home?
You can claim tax relief on your home office using the IRS Form 1040. If you’re self-employed, you can enter the deduction for your home office expenses in line 30 of Form 1040 – Schedule C. In some circumstances, you may need to attach a Form 8829 which requires a detailed breakdown of your allowable write-offs.
Generally, it’s a good idea to keep a record of any expenses you want to write off when working from home until the end of the year and file them safely in case of future external audits by the IRS.
Where two or more people share a home office, they cannot each claim the full amount for the space, but must divide the allowable expenses for working from home between them. However, they may be able to claim higher relief for utilities and bills, depending on usage.