Yes, you can indeed deduct a portion of the rent you pay for your home – but as always (and you’re probably tired of hearing me say this), this benefit is only available if certain conditions are met. The first thing we need to do is establish whether you qualify to claim a home office for tax purposes. Keep reading and I’ll fill you in on the details.
Up until the beginning of the 2018 tax year, many employees who worked from home were able to claim a deduction for the business use of their home as an itemized deduction on Schedule A. However, this deduction has been suspended for the tax years 2018 through 2025, along with a number of other miscellaneous itemized deductions.
On the other hand, the business use of home deduction may still be available if you are self-employed or a sole proprietor, provided that you use part of your home for business in at least one of the following situations:
- You use an area in the home exclusively and regularly as your principal place of business.
- You use an area in the home exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business.
- You use an area in the home on a regular basis for the storage of inventory or product samples.
- You use the home as a daycare facility.
Before going any further, let’s explain the meaning of some of the key terms used above.
Exclusive Use
The exclusive use requirement is met if a specific area of the home is used only for business, and not for anything else. The area can be an entire room or some other separately identifiable space, and it does not need to be divided from other parts of the home by a permanent partition. The area does not meet the exclusive use requirement if you use the area both for business and for personal purposes, such as a basement den you use for business during the day and watching the ball game during the evening. Exclusive use is not required if you use the area on a regular basis for storage of inventory or product samples, or if you use your home as a daycare facility.
Regular Use
Regular use means that you must use a specific area of your home for business on a regular basis. Irregular or occasional business use is not regarded as regular use. The facts and circumstances of your situation are considered in determining whether your business use is regular. For example, in the past, the Tax Court found that a taxpayer in the floor covering business who used his home office for an hour in the morning to contact customers, builders and suppliers, and for a few hours at night to return phone calls and prepare paperwork, met the regular use test. (Cole, T.C. Memo. 1999-207).
Trade or Business Use
Your use of a part of the home must take place in connection with a trade or business for the purposes of this deduction. The business use of home deduction is not allowed if you are using the area for a profit-seeking activity that does not qualify as a trade or business. For example, Joe uses his guest room regularly and exclusively for assembling wooden bird house kits that he sells from time-to-time at a nearby flea market on days when the weather is nice. This activity is more like a hobby and would not rise to the level of a business. Thus, Joe would not qualify for the business use of home deduction.
Principal Place of Business
As we all recognize, a trade or business can have two or even more locations. But to qualify for the business use of home deduction, your home must be the principal place of business for your trade or business. When making this determination, the relative importance of the activities performed at each place where business is conducted are considered, as well as the amount of time spent at each business location.
Your home office would qualify as your principal place of business if:
- Your home office is used exclusively and regularly for administrative or management activities of the trade or business, and
- There is no other fixed location where substantial administrative or management activities are conducted.
The above is not an exhaustive list of the requirements for the home office deduction, but it sets out the main principles involved. If you’re not sure whether you qualify for the deduction, you may want to check with your accountant. But assuming you do qualify to claim the deduction, the next task is to calculate the amount you are eligible to claim.
The general principle involved is that you can deduct the costs of providing the dedicated area used for your business within your home. This means that you can deduct a portion of the costs for keeping up and running the entire home, such as insurance, utilities, mortgage interest, and general repairs. Most importantly, you can also deduct a portion of the rent you paid for the home.
The portion of the above costs, including rent, that you can deduct is based on the proportion of the home that is used for business purposes. The business-use percentage can be calculated by “any reasonable method” according to the IRS. The most often-used methods are:
- The square footage of the area used for business divided by total square footage of your home, or
- If all of your rooms are about the same size, you can divide the number of rooms used for business by total number of rooms in the home.
For example, let’s say you paid $2,000 per month in rent for a home of 2,200 square feet in size, and you used an area of 400 square feet exclusively and regularly for business for the entire year. The annual deduction for the rent portion of your home office deduction is calculated as follows: ($2,000 x 12) x (400/2200) = $4,364.
To summarize, if you meet the conditions for the business in home deduction, you are allowed to deduct a portion of your rent. But bear in mind that the final calculation of your business in home deduction depends heavily on keeping good records of all your expenses related to keeping a roof over your head - not only for your family but also for your business!