Claiming the Home Office Deduction For Your LLC
If you work from home as the owner of an LLC and file taxes as a sole proprietor or member of a partnership, you’re able to claim the home office home deduction when filing your taxes with the IRS. The home office deduction allows you to subtract some office expenses from your taxable income and reduce the amount of taxes you owe. In order to claim the home office deduction, your home office must be used regularly and exclusively for business purposes. We’ll provide an overview the home office deduction and how to claim it.
What is the Home Office Deduction?
The IRS’s home office deduction makes it possible for you to deduct expenses related to the business use of your home, such as office space, utilities, home or renters’ insurance, and internet service. This decreases your taxable income and lowers your taxes.
Who Qualifies for the Home Office Deduction?
Before applying for the home office deduction, you need to know if you qualify. The home office deduction is available to individuals who are self-employed and file taxes as either a sole proprietor or as a member of a partnership.
This includes:
- Sole proprietors, including gig workers and freelancers
- Owners of single-member LLCs
- Owners of multi-member LLCs
If you work from home as an employee who receives a paycheck and W-2 from your employer, you don’t qualify for the home office deduction.
Owners of multi-member LLCs only qualify for the home office deduction of their office expenses are not reimbursed under their LLC’s operating agreement.
What Qualifies as a Home Office?
The IRS has two basic requirements for taxpayers claiming the home office deduction:
- Your home office must be used exclusively and regularly to conduct business. Business activities that you may perform in your home office include meeting with clients or customers, storing inventory or product samples, and running a daycare.
- Your home must be your principal place of business, or you must perform administrative and management tasks exclusively at your home office and in no other location. In the first scenario, it’s possible to perform some of your work outside of your home and still qualify for the deduction. However, you don’t qualify for the home office deduction if you have a home office that you conduct business in only occasionally or sometimes use to complete tasks that you would otherwise perform at an office located elsewhere.
The IRS’s definition of home is quite broad—you don’t need to own a house or even work at a brick-and-mortar property.
Home office locations can include:
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- Houses
- Apartments and condominiums
- Boats
- Mobile homes
- Separate structures on your property, such as studios or greenhouses
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A home office doesn’t have to be a separate room, either. For example, if you’re a freelance graphic designer working in a studio apartment, the area where you do your work—as long as it’s used exclusively for work—can be deducted.
Unfortunately, even if you use multiple areas in your home for business, you can only claim one area on your taxes. Some business owners, such as daycare providers, may qualify to claim their entire homes. In this case, the IRS provides some guidance on how to claim the business use of your home.
How Does the Home Office Deduction Work?
There are two ways to claim the home office deduction on your taxes: the regular method and the simple option.
The Regular Method for the Home Office Deduction
Until 2013, the regular method was the only method available for taking the home office deduction, and it can be complicated.
There are two types of expenses you can deduct under the regular method, direct and indirect expenses. Generally, direct expenses apply solely to your workspace and can be deducted in their entity.
Direct expenses include:
- Repairs made exclusively to your home office area
- Home office furniture
- Cleaning services
Indirect expenses apply to your office as it exists within your home and are calculated based on the size of your office relative to the size of your home.
Examples of qualifying indirect expenses include:
- Your mortgage or rent payment
- Home, renters’, or property insurance
- Services like utilities, internet, electricity, and security systems
- Repairs made to the entire home
To calculate indirect expenses, you’ll need to determine the square footage of your office and your home. Then you’ll divide the square footage of your office by the square footage of your home to discover what percentage of your home is occupied by your office.
You can then use this percentage to calculate how much of qualifying household expenses apply to your home office and can be deducted. For example, if your office takes up 10% of your home, you can deduct 10% of your mortgage or rent payment and other qualifying necessities, like utilities and internet service.
The Simplified Option for the Home Office Deduction
Because the regular method involves a great deal of record-keeping and, let’s face it, math, many business owners who work from home choose to claim the home office deduction using the simplified option.
With the simplified option, you don’t need to calculate percentages or add up multiple expenses. You simply claim a $5 deduction for each square foot of your home office up to 300 feet, for a max deduction of $1,500.
How to Claim the Home Office Deduction as an LLC
How you claim the home office deduction when filing taxes as LLC will depend on whether you’re a single- or multi-member LLC. You can use IRS Form 8829 to calculate your deduction if using the regular method and attach it. We recommend consulting a CPA to ensure that this deduction is claimed correctly.
Claiming the Home Office Deduction as a Single-Member LLC
As the owner single-member LLC filing under default status, you’ll file your taxes as a sole proprietor using Form 1040 and claim your home office deduction on Schedule C.
Claiming the Home Office Deduction as a Multi-Member LLC
As an owner of a multi-member LLC filing under default status using Form 1065, you should receive a copy of Schedule K-1 form from your LLC that reports your share of income, losses, and deductions. To claim the home office deduction on your personal income taxes, you’ll use the information provided in Schedule K-1 to fill out Schedule E (instead of Schedule C).
You can claim the home office deduction only if these expenses are not reimbursed by your business under your operating agreement.
Record-Keeping Considerations for IRS
In the event you’re audited, you’ll need to prove to the IRS that your home office meets all the requirements for the home office deduction and, if you use the regular method, that all claimed home office expenses were accurately calculated and truly used for your business. We recommend keeping detailed records of how much space you use for your home office, mortgage and insurance expenses, and related bills (utility, internet, and electricity).
Typically, IRS audits of taxpayers taking the home deduction are triggered by unusual behavior, like claiming 75% of your home as your home office when the average is 15% for your profession. Keeping meticulous records can help you survive an audit by showing that your taxes were filed accurately.
