We learn from Internal Revenue Service, Federal government of U.S.A. that you cannot deduct items related to your residential home, such as mortgage interest, real estate taxes, utilities, maintenance, rent, depreciation, or property insurance, as business expenses. However, you may be able to deduct expenses related to the business use of part of your home if you meet specific requirements. Even then, the deductible amount of these types of expenses may be limited. Let us learn the details of expenses that would qualify, and enable the business people to incorporate the expenses as business deductions and pay less taxes.
I R S publication 587 gives a thorough treatment of this subject with adequate examples.
Let us consider the expenses such as electricity, internet, water, storage expenses for inventory, meeting place for business purposes etc in those areas in the home where you want to claim business deductions.
Exclusive use test
To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition. In case of being an advocate, you use the room to write legal briefs and prepare clients tax returns but use the same room for passing the time in the evening for tea, coffee, or see the tv programs, you fail under exclusive use test.
Is there any exceptions to this test? Yes, you may have exceptions in case the home is used for storage of inventory or product samples and use as a day care centre.
Under exclusive test, let me explain the simple conditions.
- It needs to be the only centre for keeping up the inventory, removal of them for distribution or sampling. Occasionally, it may be used for other purposes.
- Clear marking of the areas for business purposes like board, working times etc may be visible.
Regular use
As the name indicates, the usage is very strict and the space must be used exclusively for business purposes.
Now, principal place of business clause
You can have more than one business location, including your home, for a single trade or business. To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that trade or business. To determine whether your home is your principal place of business, you must consider: The relative importance of the activities performed at each place where you conduct business, and the amount of time spent at each place where you conduct business.
In simple terms, your home must be the principal place of business even if you have other centres.
Let me quote from IRS publication, an example. —-from page 5 of publication.
“Example. Sam, a self-employed attorney, works 3 days a week in a rented office, then works 2 days a week at home, in a home office used only for business. Sam regularly meets clients there. The home office qualifies for a business deduction because Sam meets clients there in the normal course of their business.”
IRS due to the past practice, gives only examples of conventional businesses. Gen N business kids, working from the parent`s home or relative`s residences can claim the expenses if the room or halls used for business can be proved to be exclusive use of business and proper records of expenses are properly identified and electronically maintained.
What about a separate structure?
You can deduct expenses for a separate free-standing structure, such as a studio, workshop, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of operation.
The expenses can be deducted under the simplified method too alternately.
What is the simplified method?
The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. In most cases, you will figure your deduction by multiplying $5, the prescribed rate, by the area of your home used for a qualified business use. The area you use to figure your deduction is limited to 300 square feet.
What is not eligible for deduction?
Let me narrate the information.
If you elect to use the simplified method, you cannot deduct any actual expenses for the business except for business expenses that are not related to the use of the home.
You also cannot deduct any depreciation (including any additional first-year depreciation) or section 179 expense for the portion of the home that is used for a qualified business use.
The depreciation deduction allowable for that portion of the home is deemed to be zero for a year you use the simplified method. If you figure your deduction for business use of the home using actual expenses in a subsequent year, you will have to use the appropriate optional depreciation table for MACRS to figure your depreciation.
Moreover, if you make the election for a home by using the simplified method to figure the deduction for the qualified business use of that home on a timely filed, original federal income tax return, an election for a tax year, once made, is irrevocable.
To figure the amount you can deduct for qualified business use of your home using the simplified method, follow the following steps:
1. Multiply the allowable area by $5 (or less than $5 if the qualified business use is for a daycare that uses space in your home on a regular, but not exclusive, basis.
2. Subtract the expenses from the business that are not related to the use of the home from the gross income related to the business use of the home. If these expenses are greater than the gross income from the business use of the home, then you cannot take a deduction for this business use of the home.
3. Take the smaller of the amounts from (1) and (2). This is the amount you can deduct for this qualified business use of your home using the simplified method.
This method can be used under Schedule F (Form 1040) or for your home in a trade or business and you file Schedule C (Form 1040).
Actual expense method
For a qualifying home office for which the actual expenses method is used, deductible costs may include real estate taxes, mortgage interest, operating expenses (such as home insurance premiums, and utility costs) and depreciation allocated to the area used for business.
The deduction from form 8829 is entered on line 30 of schedule C.
Form is reproduced below.
https://www.irs.gov/pub/irs-pdf/f8829.pdf
The form consists of Part I (Part of Your Home Used for Business), Part II Figure Your Allowable Deduction, Part III Depreciation of Your Home, and Part IV Carryover of Unallowed Expenses to 2026.
Explanations
How Do I Complete Form 8829 Step by Step?
Form 8829 is a one-page form with four parts.
Part I: Calculate Your Business Use Percentage
1. Line 1: Enter the square footage of your office. If your lease is in square meters, multiply by 10.764 to convert.
2. Line 2: Enter the total square footage of your home (all living space).
3. Line 3: Divide Line 1 by Line 2 to get your business-use percentage.
4. Line 7: Enter your business percentage (skip Lines 4-6 unless you operate a daycare).
Example: 160 sq ft office in an 800 sq ft apartment = 20% business use.
Part II: Calculate Your Allowable Deduction
1. Line 8: Enter your business income from Schedule C, Line 29.
2. Lines 9-23: Enter your home expenses in two columns:
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- Column (a): Direct expenses (100% deductible)
- Column (b): Indirect expenses (multiplied by your business percentage)
3. Lines 24-36: The form calculates your allowable deduction, applying income limitations. The final amount on Line 36 transfers to Schedule C, Line 30.
Income limitation rule: Your home office deduction cannot exceed your business income. If expenses exceed income, the excess carries forward to future years (see Part IV).
Part III: Depreciation (Homeowners Only)
If you own your foreign property, you can depreciate the building’s value (not the land) over its useful life. Foreign residential property uses the Alternative Depreciation System (ADS) with a 30-year depreciation period, compared to 27.5 years for U.S. property.
If you own foreign property, get a professional appraisal documenting the building-versus-land allocation. This protects your depreciation basis in an audit.
Part IV: Carryover of Unallowed Expenses
If your expenses exceeded the income limitation, the unused amount carries forward to the next tax year. These carryovers remain available even if you move to a different country, as long as you continue the same business.
Further interesting facts to know.
Direct Expenses (100% Deductible)
These are costs that benefit only your office space:
- Repairs or improvements to the office area only
- Business-specific furniture or equipment for the office
- Separate business internet or phone line dedicated to the office
Indirect Expenses (Deductible Based on Business Percentage)
These are costs for the entire home, allocated by your business-use percentage like rent, utilities, property taxes, insurance, general repairs and insurance, and depreciation if you own the property.
Some more interesting facts for consideration.
The following expenses incurred by professionals entitle them towards expenses.
Dues to professional societies, operating expenses towards car used for transportation, supplies, and subscriptions to magazines., maintenance of office with associated expenses, malpractice insurance charges, cost of equipment’s etc.
One has to amortise the capital expenditures and not show as an expense.
Form no. 8829 with Part II gives a detailed information on deduction of expenses.
Conclusion
Deduction due to home office has been in existence since time immemorial and used/misused by self employed persons though any CPA would offer a correct advice and not violate the set rules/regulations.
Caution
The information collected by me are for knowledge purposes only and need an experienced CPA for tax purposes.
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