What is a home office?
A home office is a designated space in a person’s residence for official business purposes. It provides space for those who are self-employed or working remotely for an employer.
The IRS allows qualified taxpayers to claim a home office on their tax return and to deduct certain home expenses on their tax return.
Key points to remember
- Home offices provide work space from home for the self-employed or for an employer.
- A working-from-home employee can often manage their work schedule, and employers are often open to time flexibility.
- To qualify for the head office deduction, taxpayers must exclusively and regularly use part of their home or a separate structure on their property as their principal place of business.
- Employees of a business are not eligible for the home office deduction.
How a home office works
Home offices are set up by people who Work at home, whether they are self-employed or telecommuting for an employer. Home office essentials often include a desk, chair, computer or laptop, internet capability, and adequate software like Zoom to connect with colleagues who are also working remotely.
The widely used video conferencing app launched in January 2013, Zoom generated $4 billion in revenue in 2021, a 53% year-on-year increase following business shutdowns during the COVID-19 pandemic.
The Internet and other available resources have increased the ability for individuals and small business owners, including consultants, lawyers, accountants and real estate agents, to work full-time from an office in home and often benefit from Tax deductions.
With rising rental costs, many businesses have become dependent on home offices. Renting and furnishing professional office space has become expensive, especially in major metropolitan areas like New York, Chicago, and Los Angeles. According to Brookfield Asset Management Inc., rents in New York City in 2022 for “quality” office buildings are up more than 30% from pre-pandemic levels.
Prior to 2020, telecommuting grew in popularity for companies in many sectors, and employers increasingly offered this benefit to their workforce, with regular telecommuting increasing by 216% between 2005 and 2019.
Since the COVID-19 pandemic, Americans have changed the way they work. According to a Pew Research survey, one in five say they worked from home all or most of the time before the pandemic, but now 71% of those workers do their work from home all or most of the time.
Benefits of a home office
A home office is advantageous for several reasons. By eliminating commute time, a person working from home full-time can save between $600 and $6,000 a year in travel and other expenses, including clothing and work attire.
An employee can manage their own work on their own schedule, and employers are often open to time flexibility. All of this means a better work-life balance, which can lead to improved health and overall well-being for an employee, which translates into cost savings for employers, whether in dollars or in productivity.
FORM 8829
This IRS form is titled “Expenses for Business Use of Your Home” and helps determine if a home office is eligible for tax deductions.
Tax advantages of a home office
Use of a home for business purposes may include benefits such as home office tax deduction with the Tax Service (IRS). The house should be principal place of businessso even if you have a business activity outside the home, it may still qualify.
Although employees of businesses are not eligible to claim the home office deduction, self-employed persons, independent contractors, and small business owners operating from home may be eligible.
To claim the benefit, the IRS states that only space used for business is allowed and must be calculated using the percentage, or square footage, of the home for any deduction. Qualified expenses include the rent, mortgageutilities and other related expenses.
How can a home office benefit an employer?
An employer who allows employees to work remotely from their home office saves costs on rent, utilities, food service and other operational expenses needed to maintain a physical office.
How is a home office defined by the IRS?
The term “home” for tax deduction purposes includes a house, apartment, condominium, mobile home or boat. It also includes structures on the property such as a detached garage, studio, barn, or greenhouse.
What is the Home Office in reference to a company?
The term “home office” can refer to the administrative headquarters of a large company with locations in different parts of the country or around the world.
The essential
A home office is a designated space in a person’s residence used for official business purposes and provides a place to work from home for the self-employed or for an employer. Using a home for business purposes can include benefits such as the home office tax deduction with the Internal Revenue Service.