Home office in the legal setting most commonly arises regarding the potential tax deductions under § 280A(c) of the Internal Revenue Code. Since the Tax Cuts and Jobs Act of 2017 disallowed the employee business expenses deduction until 2026, only employers and self-employed individuals qualify for the home office deduction. The deduction has specific eligibility requirements that must be met. Firstly, the part of the house used for business purposes must be used exclusively for business, meaning the room claimed cannot also be used for personal activities. Secondly, business must regularly be conducted in the room, and this requirement will vary based upon the particular nature of the business. Lastly, the home office must be the principal place of business which can be satisfied by either being the location of decision making for the business or where the business owner conducts client meetings.
If a business owner meets these requirements, they can claim the deduction in two ways. They can take a deduction for a percentage of the home expenses based upon the size of the office including rent, utilities, and upkeep. This method generally equates the office share of home expenses with the percentage of the house square footage taken by the business up to 300 square feet. For example, if Charlene’s office is 200 square feet and her house is 2,000 square feet, Charlene can deduct ten percent of the home expenses for the office. Another way to calculate the deduction is the simplified method which gives a five dollar deduction for every square foot of the office up to the 300 square feet limit.
Home office as a term can also refer to the headquarters or place of decision making for an organization which may have implications for taxes and jurisdiction determinations.
[Last updated in March of 2022 by the Wex Definitions Team]
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