Home Office Deductions for Your Small Business

What is the home office deduction?

The home office deduction is a tax-saving provision that’s designed to provide relief for small business owners who use part of their home exclusively and regularly for their business.

To qualify for this tax deduction, your home office must meet three criteria: exclusivity, regularity and principal place of business.

Exclusivity: The designated area within your home must be used only for business purposes. If you use the area for both business and personal purposes, you won’t be able to claim the home office deduction. The two exceptions to the exclusivity criteria are if you use the workspace at home as a daycare facility or as a storage of inventory or product samples.
Regularity: Your home office should be a place where business activities occur on a consistent basis.
Principal place of business: If you have more than one work location, your home should be the principal place from where you conduct business. This criterion takes into consideration the importance of the performed activities in each location, as well as the time you spend at each location. If you meet clients, customers or patients in your home office and this is integral to your business, even though you have another location for business activities, you will still be able to take advantage of the home office deduction.

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Calculating the home office deduction for small businesses

You can calculate how much you can claim for your home office by two methods: the simplified method and the actual expenses method.

As the name suggests, the simplified method is a straightforward calculation. You'll multiply the square footage of your home office space (up to 300 sq. ft.) by a set rate, currently $5 per sq. ft. It's a hassle-free way to claim your deduction.
The actual expenses method involves tracking actual expenses associated with your home office. This includes a portion of your utilities, mortgage interest, property taxes, repairs and more. Keep meticulous records to support your claims.

Records for your small business home office deduction

Ensure you're maximizing your deduction while staying compliant by keeping detailed and organized records. If you choose the actual costs method, your records should include bills, invoices, receipts for office supplies, and any other expenses directly related to your home office.

You must keep records for the later of the following dates:

Two years after the tax was paid; or
Three years from the due date or filing date of your tax return

Further tips for claiming your home office deduction

Consider other deductions: While the home office deduction is a great start, you can lower your tax bill even more with other small business deductions. See our article on small business expenses you can claim. We have also prepared a free small business income and expenses spreadsheet you can use to keep track of your business activity.

Seek professional guidance: consider enlisting the expertise of a tax professional. They can guide you through the laws, ensuring you're well-prepared for tax season.

Stay consistent: Once you've chosen a calculation method, stick to your chosen approach from year to year to streamline the process.

Optimize your workspace: If you're considering a home office makeover, remember that the size of your workspace matters for deduction purposes. Ensure your designated area complies with the use criteria.

FAQ

Are home office renovations tax deductible?

Renovations done to your home office are deductible so long as the designated office area follows the criteria of exclusivity, regularity and principal place of business. Read more about the criteria in this article.

How do I calculate my home office tax deduction?

There are two calculation methods you can use for your small business home office tax deduction - the simplified and actual costs methods. The simplified method will produce a deduction of $5 per sq. ft., while the actual expenses method ensures you a claim for real costs you’ve incurred for your home office, including bills, property tax, mortgage, and more.

Are home office repairs tax deductible?

You can deduct home office repairs for your small business if the repairs were limited to the space you use solely for your business activity and it satisfies the criteria for exclusivity, regularity and principal place of business.