If you are self-employed or a partner in a business, you may be able to deduct certain expenses for the part of your home that you use for business as long as you use part of your home exclusively and regularly as your principal place of business for your trade or business. This deduction is not available to W-2 employees, even if you worked from home during 2020.

Expenses: Direct, Indirect, and Unrelated

Direct expenses such as painting or repairs in the home office are fully deductible.

Indirect expenses for the entire home, such as real estate taxes, insurance, utilities, and general repairs are deductible based on the percentage of the home used for business.

Unrelated expenses, expenses such as lawn care or painting a room not used for business, are not deductible at all. Home expenses for any period during the year where the home was not used for business should be excluded.

Business Percentage

Business percentage is calculated by dividing the square footage of the space exclusively used for business by the square footage of the entire home.

Deduction for a Portion of the Home Itself

Depreciation expense may be allowed equal to the business use percentage based on either the home’s original purchase cost or the fair market value at the date the home was first used for business. Mortgage principal payments are never deductible as an expense, although mortgage interest is partially deductible. Depreciation expense for permanent home improvements may be deductible in the same manner as the home.

Limitations

The business use of home deduction is limited to the net income of the business. If the business has $0 net income or a loss, the business use of home deduction is not allowed.

Standard and Simplified Methods

The standard method takes the actual expenses and applies the business percentage.

The simplified method allows a deduction of $5 per square foot of home used for business, capped at 300 square feet.

If you are looking for a CPA or have any questions about accounting services, please contact me, Catherine Roe, at catherine@cowartroecpa.com or 504-252-0652. I would love to work with you!