As a self-employed therapist who files as a Sole Proprietor, you may be eligible to claim a Home Office Deduction if you regularly use part of your home for work. This deduction can help reduce your taxable income by allowing you to write off a portion of your home expenses.
To determine how much of your home expenses can be claimed, we consider the percentage of your home that is used exclusively for business purposes. This is typically based on square footage.
Example: If your home is 1,000 square feet and your office is 100 square feet, your home office makes up 10% of your home. That means 10% of your eligible expenses could be deductible.
How do I qualify for home office deductions?
According to the IRS, you may qualify for the Home Office Deduction if you meet the following two requirements:
- Regular and Exclusive Use: You must regularly use part of your home exclusively for conducting business. This means the space cannot be used for personal activities at any time.
- Principal Place of Business: Your home must be your principal place of business. This means you use the space to conduct administrative or management tasks, such as scheduling, billing, charting, or virtual sessions.
Choosing a deduction method
During annual tax filing, you'll need to choose between the simplified or standard deduction method.
Please note: this deduction is highly auditable. Please assess your level of risk tolerance when determining which method to use. In general, if you are audited:
- Simplified Method - You will only need to prove the space size and usage.
- Standard Method - You would need to prove every expense claimed, including the size of the space and usage.
Simplified deduction method
The simplified method is a simpler way to calculate home office deductions, as it's measured by the total square footage used for your home office.
This is better suited for people who:
- Can claim the deduction without needing to track additional expenses throughout the year.
- Have a small home office. The calculations are less complex, and there may be a slightly larger deduction by claiming $5 per square foot with a maximum of 300 square feet. Total deduction would be $1,500.
Standard(actual) deduction method
The standard method (actual method) is based on the actual expenses you report, such as mortgage interest, rent, insurance, utilities, and other typical home costs. You’ll also need to calculate the percentage of your home devoted solely to business activities.
This is better suited for people who:
- Have a large amount of home-related expenses that can be attributed to the home office.
- Have a larger home office and high-cost utilities or home expenses.
If you decide to use the standard method, you will need to collect last year's bills and receipts to calculate the total sums. As mentioned above, when you enter the sums, you must report actual expenses, not estimates.
Important consideration for homeowners
If you own your home and use part of it for business, claiming depreciation is required when using the standard deduction method for the home office deduction (it is not required when using the simplified method).
The IRS treats depreciation as a necessary part of calculating your business use of home expenses, because the building (not the land) is considered a business asset when part of it is used for work.
Why is it important:
Recapture tax may apply: If you sell the home later, you may owe tax on the depreciation you claimed (called depreciation recapture), even if you exclude the home sale gain under the primary residence exclusion rules. This is an unexpected tax gain in the year of sale.
The IRS does not let you skip it if you’re using the actual expense method. Even if you don’t actively deduct it, the IRS assumes you did when calculating future tax consequences (especially if you sell your home).
What expenses can I claim?
Home office expenses fall under two types of expenses:
- Direct - costs that are acquired specifically regarding your home office. Such as renovating your home office or fixing a maintenance issue in the office itself.
- Indirect - costs of owning or renting your home as a whole. These expenses will be allocated based on the square feet used exclusively for business. For example, when you're entering your total rent, you'll add up all of the monthly payments you made during the previous year, and the percentage related to your business space will be applied to the total.
These expenses should be paid via your personal bank account, not your business account. The following are types of expenses that can be claimed:
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Mortgage Interest or Rent Payments
- Mortgage Statements: Provide monthly mortgage statements showing interest payments.
- Lease Agreement and Rent Receipts: If you rent, provide a copy of your lease and rent payment receipts or canceled checks.
- Utility Bills: Provide copies of utility bills (e.g., electricity, gas, water) to substantiate the percentage of these expenses allocated to the home office.
- Property Tax Statements: Provide copies of property tax statements.
- Homeowner's or Renter's Insurance: Provide copies of insurance policies and payment records.
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Repairs and Maintenance
- Receipts and Invoices: Provide receipts and invoices for any repairs or maintenance specifically related to the home office.
- Logs or Records: Maintain logs or records of general repairs and maintenance for the entire home, including the calculated business portion.
Considerations for telehealth
- Exclusive use: The space in your home must be used exclusively for business. If your home office is solely dedicated to telehealth sessions and other business activities, this requirement is met.
- Regular use: You must use the home office regularly for your telehealth appointments. If your telehealth sessions happen frequently from the home office, they count toward the regular use requirement.
- Principal place of business: If your home office is where you conduct most of your business activities, including telehealth services, it qualifies as your principal place of business.
How does Heard track Home Office Expenses for Sole Proprietors?
During tax season, we will request a copy of your completed Home Office Deduction tracker as part of your annual tax documentation. Your tax preparer will perform a final review at the end of the year to ensure all amounts entered are accurate and can be included in your annual tax return.
We recommend updating your home office deduction tracker on a quarterly basis. If you’d like to be proactive, you may also update monthly and upload to Heard. Please see Using Heard's Home Office Deduction Tracker.