The home office deduction is the amount a taxpayer may deduct for the part of a home used for business, and it exists as a narrow exception to a rule that otherwise disallows those expenses completely. That framing is not decoration. The statute starts by switching the deduction off and then switches parts of it back on, so a home office claim is not built by adding up expenses, it is built by clearing a specific exception.
The starting rule is a flat denial. Except as otherwise provided in this section, in the case of a taxpayer who is an individual or an S corporation, no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence (26 U.S.C. 280A(a)). For purposes of this section, the term dwelling unit includes a house, apartment, condominium, mobile home, boat, or similar property, and all structures or other property appurtenant to such dwelling unit (26 U.S.C. 280A(f)(1)(A)), so the rule is not about houses in particular.
One category is never caught by the denial in the first place. Subsection (a) does not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business, or with his income-producing activity (26 U.S.C. 280A(b)). Mortgage interest and the tax on the property are the everyday cases, and where the latter goes on a return is set out in real estate tax.
Two Conditions and Then a Choice of Three
This is the test, and its shape matters as much as its content, because two of its parts are joined and three of them are alternatives.
Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis as the principal place of business for any trade or business of the taxpayer, as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or, in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer’s trade or business (26 U.S.C. 280A(c)(1)).
Read the joints. Exclusively and on a regular basis are joined and both have to hold. The three uses that follow are separated by “or”, so only one of them has to hold. A space that is a principal place of business but doubles as a spare bedroom fails on exclusivity before the three alternatives are ever reached, and a space used exclusively for business but only twice a year fails on regularity. Both failures happen upstream of the part most people argue about.
The word portion does work too. The exception applies to the extent an item is allocable to a portion of the dwelling unit, so the unit of analysis is the space, not the house and not the taxpayer.
The statute then defines the first alternative rather than leaving it to litigation, and the definition is wider than the ordinary meaning. For purposes of subparagraph (A), the term principal place of business includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business (26 U.S.C. 280A(c)(1)). A contractor who works on client sites all day and does the billing at a home desk can reach subparagraph (A) through this sentence, provided there is no other fixed location where that administrative work substantially happens.
Two more exceptions sit beside the business one and get missed. Storage space escapes the denial where it is used on a regular basis as a storage unit for inventory or product samples held for use in the taxpayer’s trade or business of selling products at retail or wholesale, but only if the dwelling unit is the sole fixed location of that trade or business (26 U.S.C. 280A(c)(2)). Notice what is absent from that one: it requires regular use and it does not require exclusive use. Day care use has its own exception, again on a regular basis and without an exclusivity requirement, for a trade or business of providing day care for children, for individuals who have attained age 65, or for individuals who are physically or mentally incapable of caring for themselves (26 U.S.C. 280A(c)(4)(A)), subject to a licensing condition in the subparagraph that follows it.
The Ceiling That Appears at the End
Clearing the test does not fix the amount. A second rule caps it, and it is the part that turns a large computed figure into a smaller allowed one.
In the case of a use described in paragraph (1), (2), or (4), and in the case of a use described in paragraph (3) where the dwelling unit is used by the taxpayer during the taxable year as a residence, the deductions allowed under this chapter for the taxable year by reason of being attributed to such use shall not exceed the excess of the gross income derived from such use for the taxable year over the sum of two amounts: the deductions allocable to such use which are allowable under this chapter for the taxable year whether or not such unit, or portion thereof, was so used, and the deductions allocable to the trade or business, or rental activity, in which such use occurs but which are not allocable to such use, for such taxable year (26 U.S.C. 280A(c)(5)). The opening words carry four paragraph references and the fourth of them, paragraph (3), reaches rental use only where the unit is used as a residence in the year. Both subtractions are part of the ceiling. The first takes out the amounts that would have been deductible anyway, the ones subsection (b) already let through. The second takes out the rest of the business’s own expenses. What is left of the gross income from that use is the room the home office deduction has.
The statute does not throw away what does not fit. Any amount not allowable by reason of that sentence shall be taken into account as a deduction allocable to such use for the succeeding taxable year, and any amount taken into account that way is subject to the same first-sentence limitation whether or not the dwelling unit is used as a residence during that year (26 U.S.C. 280A(c)(5)).
The Two Methods, and What the Simpler One Costs
Actual expenses are the default and the statute assumes them. A safe harbor sits alongside, and it is an election rather than a rule.
A taxpayer determines the amount of deductible expenses for a qualified business use of the home for the taxable year under the safe harbor method by multiplying the allowable square footage by the prescribed rate, the allowable square footage is the portion of a home used in a qualified business use of the home but not to exceed 300 square feet, and the prescribed rate is $5.00, which the Service and the Treasury Department may update from time to time as warranted (Rev. Proc. 2013-13, section 4.01). The IRS states the same two figures in its current guidance, a standard deduction of $5 per square foot of home used for business with a maximum of 300 square feet (IRS, Simplified option for home office deduction), so the ceiling on the method is the product of those two numbers rather than a separately stated amount.
The safe harbor does not loosen the test. The IRS says the same thing about its own simplification, that it does not change the criteria for who may claim the deduction (IRS, Simplified option for home office deduction).
What the election costs is worth naming, because it is not obvious from the arithmetic. A taxpayer electing the safe harbor for a taxable year cannot deduct any actual expenses related to the qualified business use of that home for that taxable year, except as the revenue procedure provides (Rev. Proc. 2013-13, section 4.01). Under the simplified option there is no home depreciation deduction and no later recapture of depreciation for the years it is used, home-related itemized deductions are claimed in full on Schedule A rather than apportioned, and an amount in excess of the gross income limitation may not be carried over, where under the regular method it may (IRS, Simplified option for home office deduction). The carryover difference is the one that matters in a lean year, and the recapture difference is the one that matters at a sale, which is worked through in depreciation recapture.
Employees Cannot Take It
The exception in subsection (c)(1) has an extra condition attached for one class of taxpayer. In the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer (26 U.S.C. 280A(c)(1)). That condition is now beside the point, because a different section closes the route entirely.
Notwithstanding subsection (a), no miscellaneous itemized deduction shall be allowed for any taxable year beginning after December 31, 2017 (26 U.S.C. 67(h)). The IRS puts the consequence in plain terms, that taxpayers can no longer claim a deduction for use of a home office as an employee, as miscellaneous itemized deductions for employee business expenses were eliminated for tax years beginning after 2017, even if the simplified method is used (IRS, Simplified option for home office deduction).
Common Questions
A taxpayer carrying on a trade or business who clears the test in subsection (c)(1), (c)(2) or (c)(4). In practice that means the self-employed and other filers reporting business income, and the schedule most of them use is set out in Schedule C. An employee cannot, for the reason above.
The statute says a portion of the dwelling unit, not a room (26 U.S.C. 280A(c)(1)). What it does require of that portion is exclusivity, which is the harder condition for a corner of a shared room to meet.
Not through this route. The ceiling in subsection (c)(5) stops the deduction at the gross income from the use after the two subtractions, and the excess carries to the succeeding taxable year instead (26 U.S.C. 280A(c)(5)). Under the simplified option that carryover is not available (IRS, Simplified option for home office deduction).
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