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Tax Deductions for Working From Home: Boost Your Bottom Line

By Genki Hirano

Published on 2 Feb 2024 7 min read

As the trend of working from home continues to grow, more individuals are getting a taste of managing business-related tasks, including understanding tax deductions. However, grasping the intricacies of tax deductions can be quite challenging for many. 

We aim to demystify this topic and provide a comprehensive guide on everything you need to know about tax deductions when working from home. Read on to delve deeper into maximizing your tax benefits and navigating the complexities of home office deductions.

Can You Claim Work-From-Home Tax Deductions?

The tax deductions for working from home (WFH) depend on your employment status and the use of your workplace. Employees of companies cannot generally claim these deductions. 

However, self-employed persons, freelancers, and business owners who work from home can do so. The prerequisite is that the room is used exclusively and regularly for business purposes. This means a dedicated office space or a separate area in your home is deductible, but multi-purpose rooms such as dining tables are not. 

Furthermore, these deductions only apply to expenses that are directly related to the business use of your home, such as a portion of rent, utilities, and internet costs.

Work-From-Home Tax Deductions

If you fall under one of the three categories mentioned above, let’s go over what you can deduct for your work-from-home ventures. 

1. Home Office Space

Expenses for a home office are deductible. This includes a proportionate share of the rent or mortgage interest, property tax, and homeowner’s or landlord’s insurance. The space must be used exclusively for business purposes to be deductible. 

To calculate the deduction, you must measure the office space, divide it by the total square footage of your home, and apply that percentage to the total expenses for the home.

2. Utilities

A portion of your home utility costs, such as electricity, heating, and water, can be deducted in proportion to the size of your home office. This deduction recognizes that running a business from home usually increases these costs. However, only the additional amount attributable to business use is deductible, not the entire utility bill.

3. Internet and Phone Expenses

If you use the Internet and a telephone connection for business purposes, these costs are partially deductible. You can only deduct the part of the bill that is directly related to your work. Private use is not deductible. For exclusive business connections or Internet connections, the entire cost can be claimed.

4. Office Supplies and Equipment

Office supplies and equipment necessary for your business, such as computers, printers, and paper, are deductible. These items must be used exclusively for your business activities. Larger purchases can be depreciated over several years, providing a deduction for the item’s wear and tear.

5. Software and Subscriptions

Any software or subscription services used for your business can be deducted. This includes productivity tools, professional memberships, and industry-specific software. The key is that these services must be directly related to your business operations and not for personal use.

6. Home Maintenance and Repairs

Home maintenance and repair costs that directly impact your business area are deductible. This can include repairs in the home office or general maintenance that affects the entire house. Keep in mind that deduction is proportional to the size of the home office compared to the entire home.

Expenses You Can’t Deduct for Working From Home

Because there are so many business expenses that are tax deductible, you may start to wonder what qualifies as a deduction. Check out the expenses you cannot deduct for working from home. 

1. Commuting Costs

Even if you occasionally travel on business, the daily costs of commuting from your home to another place of work are not deductible. This includes expenses such as gasoline, public transportation tickets, or parking fees for regular trips. These are considered personal expenses by the IRS, regardless of how often or why you travel for business.

2. Personal Use Items

Items that are used for both personal and business purposes cannot be deducted in full. This includes items such as a personal computer or cell phone that are used for both work and leisure. Only the portion of the expense that is directly attributable to business use is deductible, and accurate records must be kept to justify the business-related portion.

3. Home Renovations and Improvements

Major renovations and improvements, even if they benefit your study, are generally not deductible. Unlike minor repairs or maintenance, these larger expenses are considered capital improvements and cannot be claimed as direct home office expenses. However, these expenses can potentially affect the depreciable basis of your home.

4. Homeowners Association (HOA) Fees

Homeowners Association fees are generally not deductible if you work from home. Although these fees may contribute to the general upkeep of your living environment, they are not directly related to your home office or business operations. They are, therefore, classified as personal expenses.

5. Standard Household Items

Everyday household items and expenses like groceries, home decor, or non-business-related furniture, are not deductible. These expenses are part of maintaining your home life and are not directly related to your home office or business activities. The IRS makes a strict distinction between personal living expenses and business expenses.

How to Prepare to File Taxes and Track Tax Deductions for Working From Home?

When you start calculating your deductions, you need to prepare your tax return properly. This is important to uphold legal compliance and to ensure that all expenses are taken into account. Below, we have compiled the most important tips for you to consider when preparing your tax return and deductions.

Organize Your Documents

Begin by gathering all necessary financial documents. These include receipts, bills, bank statements, and any records of income. For home office deductions, you’ll need details like your rent or mortgage, utilities, property taxes, and any home office expenses. Organizing these documents early ensures you have a complete picture of your finances and can accurately calculate deductions.

Designate a Specific Workspace

If you’re claiming home office expenses, ensure you have a designated workspace that’s used exclusively for business purposes. This space should be regularly used for your work and not serve a dual purpose in your personal life. Documenting this space, through photos or a floor plan, can help substantiate your claim.

Use Accounting Software or Spreadsheet

Utilize accounting software or a simple spreadsheet to track your income and expenses throughout the year. This makes it easier to categorize expenses and calculate deductions. Regularly updating this record reduces the risk of missing out on potential deductions and aids in accurate tax filing.

Understand Eligible Deductions

Educate yourself on what expenses are deductible and how they should be calculated. This includes understanding the difference between direct and indirect expenses for your home office and knowing the specific IRS rules that apply to self-employed individuals and home-based businesses.

Consult a Tax Professional

Consider consulting a tax professional, especially if you’re new to filing taxes with home office deductions. Tax laws can be complex, and a professional can offer personalized advice, ensure compliance, and help identify all possible deductions to maximize your return.

How to Claim Work-From-Home Deductions on Your Taxes?

Claiming tax deductions for working from home requires a systematic process to ensure accuracy and compliance. Here is a step-by-step guide to help you through the process:

• Determine Your Eligibility: First, confirm if you’re eligible for home office deductions. This typically applies if you’re self-employed, a freelancer, or a business owner using part of your home regularly and exclusively for business (as mentioned earlier).
• Calculate Your Deductible Expenses: Calculate the expenses related to your home office. This includes direct expenses (entirely for your office) and indirect expenses (like a percentage of your rent/mortgage, utilities, etc., based on the size of your office space relative to your home).
• Use the Appropriate IRS Form: If you’re self-employed, use Schedule C (Form 1040) to report income and expenses.
• Choose Your Deduction Method: Decide between the simplified method (a standard deduction of $5 per square foot of home office space, up to 300 square feet) and the regular method (itemizing actual expenses). The simplified method requires less paperwork and calculation.
• Keep Records and Receipts: Maintain thorough records and receipts of your expenses. This is crucial if the IRS requires proof or clarification of your deductions.
• Fill Out the Form Accurately: When filling out your tax forms, ensure all information is accurate and matches your records. Incorrect or incomplete information can lead to delays or audits.

Final Thoughts on Tax Deductions for At-Home Entrepreneurs

It’s often necessary to invest in tools and software to give your home-based business an edge.

These investments can help streamline your operations and ensure you’re compliant with the law. However, when it comes to tax deductions, there can be confusion about what counts as a business expense. The question of how you can claim these deductions for tax purposes is also not always easy to answer.

At doola, you get everything you need for your tax return from a single source. With our easy-to-use bookkeeping software, you can make all your financial adjustments in no time at all, and have all your documents in one place. And if you’d rather work one-on-one with accounting professionals, we have a team of certified and talented accountants ready to support you every step of the way, so you don’t have to worry about missing a beat.

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