Can You Deduct a Home Office if You Work Remotely?

If you work from a spare bedroom every day, it feels obvious that part of your rent or utilities should be deductible. For a large share of remote workers in the United States, the federal answer is no, and the reason has nothing to do with how much you use the room. It depends on whether you are an employee or self-employed. Here is what the IRS's own guidance says, in plain terms.

The short answer for employees

The IRS's page on the simplified home office method states it directly: taxpayers can no longer claim a deduction for use of a home office as an employee, because miscellaneous itemized deductions for employee business expenses were eliminated for tax years beginning after 2017. The IRS adds that this is true even if the simplified method is used.

So if you receive a W-2 from an employer and work remotely for them, the federal home office deduction is not available to you, no matter how dedicated your workspace is. If your employer reimburses home office costs under its own policy, that is a separate matter between you and your employer.

State tax rules can differ from federal rules, so check your state's guidance separately.

Who can claim it

The IRS's Topic 509 describes the deduction as available to people who are self-employed or partners, for the part of the home used for business. To qualify, you generally must use part of your home in one of these ways:

1. Exclusively and regularly as your principal place of business for your trade or business.
2. Exclusively and regularly as a place to meet clients, customers or patients in the normal course of business.
3. A separate structure, not attached to your home, used exclusively and regularly for the business.
4. Regular storage of inventory or product samples, if your home is the only fixed location of a retail or wholesale business.
5. Rental use.
6. A daycare facility.

If you freelance or run a side business, these are the tests to look at.

The exclusive use test trips up many people

For most qualifying uses, the space must be used exclusively for business. The IRS gives an example: an attorney who uses a den both to write legal briefs and for personal purposes cannot deduct any business use of that den.

In practice, a desk in the corner of the family room that also serves as the place you pay household bills and help with homework likely fails the test. A spare room used only for your business is the clearer case. The IRS notes two exceptions where exclusive use is not required: storage of inventory or samples when the home is the business's only fixed location, and regular use for daycare services.

The IRS also explains that a home office can count as your principal place of business if you use it for administrative or management work and have no other fixed location where you do substantial administrative or management activities. That matters for people who do the actual work at client sites but run the business from home.

Two ways to calculate it

The regular method. You divide home expenses between personal and business use. Direct business expenses are deductible in full. Indirect expenses, such as a share of rent, mortgage interest, real estate taxes, utilities, insurance, repairs and depreciation, are generally allocated by the percentage of your home's floor space used for business. Self-employed people filing Schedule C first compute this on Form 8829.

The simplified option. The IRS allows a prescribed rate of $5 per square foot of the business portion of the home, up to a maximum of 300 square feet. Some examples:

Because of the 300 square foot cap, $1,500 is the most the simplified option can produce in a year.

The IRS lists other features of the simplified option:

• There is no depreciation deduction for the home, and no later recapture of depreciation for those years.
• Home-related itemized deductions you could take anyway, such as mortgage interest and real estate taxes, are claimed in full on Schedule A instead of being split.
• You still have to meet the exclusive and regular use requirements. The simpler math does not change who qualifies.

The income limit applies either way

Under both methods, the deduction cannot exceed the gross income from the business use of your home, minus other business expenses. The difference is what happens to the excess. Under the regular method, the IRS says you may be able to carry it forward to the next year. Under the simplified method, there is no carryover.

You can choose either method for any tax year by using it on a timely filed original return, but the IRS states that once you choose a method for a year, you cannot switch to the other method for that same year.

A quick self-check

• Are you a W-2 employee working from home for your employer? The federal deduction is not available, per the IRS.
• Are you self-employed or a partner? Check whether your space meets one of the qualifying uses.
• Is the space used only for business? If it doubles as personal space, it probably fails the exclusive use test, with the inventory and daycare exceptions noted above.
• Do you want simple records? The simplified option is $5 per square foot up to 300 square feet, with no depreciation.

For anything beyond these basics, IRS Publication 587 covers the rules in full, and a tax professional can look at your situation.

Key takeaways

• The IRS says employees can no longer deduct a home office for tax years beginning after 2017, even with the simplified method.
• Self-employed people and partners may qualify if they meet one of the IRS's qualifying uses.
• Most uses require the space to be used exclusively and regularly for business.
• The simplified option is $5 per square foot for up to 300 square feet, a $1,500 maximum.
• The deduction cannot exceed the business's gross income from home use; only the regular method allows carrying the excess forward.