What Is a Home Office?
A home office is a space designated in a person's residence for official business purposes. It provides a space for those that are self-employed or work remotely for an employer.
The IRS allows qualified taxpayers to claim a home office on their tax return and deduct certain home expenses when they file taxes.
- Home offices provide a space to work from home for those that are self-employed or work for an employer.
- An employee working from a home often can manage their work schedule and employers are often open to time flexibility.
- To claim the home office deduction, taxpayers must exclusively and regularly use part of their home or a separate structure on their property as their primary place of business.
- Employees of a company are not eligible to claim the home office deduction.
How a Home Office Works
Home offices are set up by people who work from home, whether self-employed or telecommuting for an employer. Essentials within a home office often include a desk, chair, computer or laptop, internet capability, and adequate software like Zoom to connect with co-workers who are also working remotely.
The widely used video conferencing app launched in January 2013, Zoom generated $4 billion in revenue in 2021, a 53% increase in one year following the shuttering of businesses during the COVID-19 pandemic.
The internet and other available resources have increased the opportunity for individuals and small business owners, including consultants, lawyers, accountants, and real estate agents, to work from a home office full time and often benefit from tax deductions.
With rental costs rising, many businesses have become dependent on home office space. Renting and furnishing a professional office space has become costly, especially in large metropolitan areas like New York City, Chicago, and Los Angeles. According to Brookfield Asset Management Inc., rents in New York City in 2022 for “quality” office buildings have climbed more than 30% from pre-pandemic levels.
Before 2020, telecommuting saw a steady rise in popularity for businesses in many industries, and employers increasingly offered this benefit to their workforce with regular telecommuting growing 216% between 2005 and 2019.
Since the COVID-19 pandemic, Americans have changed the way they work. According to a Pew Research survey, one in five say they worked from home all or most of the time before the pandemic, but now 71% of those workers are doing their job from home all or most of the time.
Advantages of a Home Office
A home office is beneficial for a number of reasons. By eliminating commute time, someone working from home full-time can save between $600 and $6,000 annually in travel-related and other expenses, including clothing and work attire.
An employee can manage their own work on her own schedule and employers are often open to time flexibility. All that means a better work-life balance, which can lead to an improvement in an employee's overall health and wellness, resulting in cost savings to employers, whether in dollars or in productivity.
This IRS Form is entitled, "Expenses for Business Use of Your Home," and helps determine if a home office qualifies for tax deductions.
Tax Benefits of a Home Office
Using a home for business purposes can include benefits such as the home office tax deduction with the Internal Revenue Service (IRS). The home must be the principal place of business, so even if you do some business activity outside the home, it can still qualify.
Although employees of companies are not eligible to claim the home office deduction, self-employed, independent contractors, and small business owners operating from home may qualify.
To claim the benefit, the IRS states that only the space used for business is allowed, and must be calculated using the percentage, or square footage, of the home for any deductions. Qualified expenses include rent, mortgage, utilities, and other related expenses.
How Can a Home Office Benefit an Employer?
An employer who allows employees to work remotely from their home office saves costs on rent, utilities, food services, and other operational expenses required to maintain a physical office.
How Is a Home Office Defined by the IRS?
The term "home" for purposes of tax deduction includes a house, apartment, condominium, mobile home, or boat. It also includes structures on the property like an unattached garage, studio, barn, or greenhouse.
What Is the Home Office in Reference to a Corporation?
The term “home office” can refer to the administrative headquarters of a large corporation with locations in different parts of the country or around the world.
The Bottom Line
A home office is a designated space in a person's residence used for official business purposes and provides a place to work from home for those that are self-employed or work for an employer. Using a home for business purposes may include benefits such as the home office tax deduction with the Internal Revenue Service.