What expense category is Home Office Expenses?

For many small business owners and sole proprietors, their home serves as the headquarters. The IRS allows you to deduct expenses for the business use of your home, which can translate into significant tax savings. However, the home office deduction is one of the most scrutinized by the IRS, with strict rules you must follow to qualify.

These costs aren't a simple line-item expense. They involve a specific calculation based on direct and indirect costs, and the final deduction is limited by your business income. This guide breaks down the IRS requirements, outlines the expenses you can claim, and explains how to track them for bulletproof compliance.

The Home Office Expense Category

There is no single "Home Office" expense category on the Schedule C. Instead, the home office deduction is a special calculation that combines portions of various household expenses. You figure the total deductible amount using Form 8829. The final calculated deduction is then carried over to Line 30 of Schedule C (Form 1040).

As an alternative, the IRS offers a simplified method, which allows you to deduct a standard amount ($5 per square foot, up to 300 square feet) instead of tracking actual expenses.

Important Considerations for Claiming the Home Office Deduction

To deduct home office expenses, you must meet two fundamental tests as outlined in IRS Publication 535 and Publication 334.

Test 1: Exclusive and Regular Use

• Exclusive Use: You must use a specific area of your home only for your trade or business. If you use the area for both business and personal purposes, it fails this test. For example, using a den to meet clients and also for family recreation disqualifies it.
• Regular Use: You must use the business area of your home on a continuous, ongoing basis. Occasional or incidental business use does not qualify.

Exceptions: Publication 535 notes that this rule does not apply if you use part of your home for the storage of inventory or product samples, or as a daycare facility.

Test 2: Principal Place of Business

The business part of your home must be one of the following:

1. Your principal place of business.
2. A place where you meet or deal with patients, clients, or customers in the normal course of your business.
3. A separate free-standing structure (like a studio or garage) used in connection with your business.

Your home office qualifies as your principal place of business if you use it exclusively and regularly for the administrative or management activities of your business, and you have no other fixed location where you conduct substantial administrative or management activities on a regular basis.

Examples of Deductible Home Office Expenses

Home office expenses are divided into two types: direct and indirect.

Direct Expenses

These are costs that apply only to the business part of your home. They are 100% deductible.

Example: The cost of painting or repairing only your home office.

Indirect Expenses

These are the costs associated with maintaining and operating your entire home. You can deduct the portion of these expenses that corresponds to the percentage of your home used for business.

Examples:

• Mortgage interest
• Real estate taxes
• Rent (if you rent your home)
• Utilities (electricity, heat, water)
• Homeowners' or renters' insurance
• General home repairs (like fixing the furnace or roof)
• Depreciation (for the portion of your home used for business)

Tax Implications and the Deduction Limit

The amount of home office expenses you can deduct is limited by your business income.

The Deduction Limit

As explained in Publication 334, your deduction for home office expenses cannot exceed the gross income from the business use of your home, minus your other business expenses. In other words, the home office deduction cannot be used to create a business loss. Any expenses that cannot be deducted in the current year due to this limit can be carried forward to the next year.

How to Report the Deduction

1. Calculate the Deduction: Use Form 8829 to figure the allowable expenses for the business use of your home and any deduction limitations.
2. Report on Schedule C: Transfer the total allowable deduction from Form 8829 to Line 30 of your Schedule C (Form 1040).

How Fyle Can Automate Tracking for Home Office Expenses

Fyle simplifies the process of tracking various household expenses that contribute to your home office deduction calculation, ensuring you have the necessary documentation for Form 8829.

• Capture All Household Bills: Forward utility bills, insurance statements, and repair invoices directly to Fyle from your email.
• Tag Indirect Expenses: Tag all relevant household costs (rent, utilities, insurance) so you can easily total them at year-end for the Form 8829 calculation.
• Track Direct Office Costs: Instantly capture receipts for direct expenses, such as office repairs or supplies, using the Fyle mobile app.
• Automate Your Accounting: Fyle syncs the final home office deduction amount to your accounting software—such as QuickBooks, Xero, NetSuite, or Sage Intacct—for a complete and accurate picture of your business's profitability.