The Home Office Deduction is available to Sole Proprietors who utilize a home office for business for more than 60% of their work week. In order to calculate how much can be written off as a business cost, we ask what percentage of your home is exclusively used for business.
Before we dive into the questions, there are a few pieces of information you should know up front as you're filling out the HOD section:
- The amounts you enter on the HOD form shouldn't already be in your Heard books. This means these are expenses that you have paid for as a renter/homeowner and are only claiming the amounts in this deduction.
- If you are itemizing your deductions and claiming some amounts on your Schedule A, then you cannot claim it on the forms in the HOD section.*
- If you're using the standard method, you must report actual expenses. Do not enter estimates. (See below for differences between standard and simplified method).
How do I qualify for home office deductions?
- Your home office must be used exclusively for business, meaning that the space is not used for any other personal use. If your home office doubles as a guest bedroom, gym space, or lounge area, it doesn't qualify for receiving tax deductions.
- You utilize your home office space for 60%+ of your workweek
- You are a self-employed individual (sole proprietor, LLC, PLLC)
You cannot claim a home office deduction if you have an actual office for your practice. In that case, you’d claim all necessary utilities from your office expenses.
Should I take the Simplified or Standard deduction?
The simplified method is a simpler way to calculate the home office deductions as it's measured by the total amount of square feet 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.
The standard method is based on the actual expenses that you report, like your mortgage interest or 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 do decide to use the standard method, you will need to collect this past year's bills and receipts in order to add up the total sums. As mentioned above, when you enter the sums, you must report actual expenses, not estimates.
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 be able 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.
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.
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.