By Dr. Jim Dahle, WCI FounderI have been blogging for 13 years and working from home that entire period. However, I've only written about the tax breaks available to those with a home business a few times, and much of the time, I write about how I'm not getting any of them! But things have changed over the years, and it's time to revisit this topic on tax deductions for a home office.
The Home Office Deduction
The first tax break to consider if you work from home is the home office deduction. This used to be a really complicated deduction to take. You had to figure out all the costs of your home (mortgage, property taxes, depreciation, utilities, etc.) and then multiply them by the fraction of your home used by the business.
However, beginning in 2013, the IRS offered a MUCH easier way to take this deduction. You simply calculate the square footage of the home office and you take $5 per square foot as a deduction. It goes on line 30 of Schedule C for a sole proprietor, line 21 of Form 1065 for partnerships, and line 20 of Form 1120S for S Corps. (Technically for an S Corp, you should set up an “accountable plan” where the business reimburses you those expenses and then places them on line 19. We do this for lots of WCI expenses.)
You can still use the old method (and you have to if your home office is greater than 300 square feet), but I'd try to avoid it just for simplicity's sake. Unfortunately, that $5 per square foot figure is not indexed to inflation. Also, unless you're in a pretty inexpensive home (especially if renting), going through the 44-line Form 8829 is probably going to get you a larger deduction than the simplified method. But AT LEAST take the simplified method. The simplified method also has the advantage of not being recaptured when you sell the home, which is worth something.
3 Rules to Qualify for the Home Office Deduction
#1 Must Be the Principal Place of Your Business
This one can get tricky, although it's easy if there's no other place where you do business. If there is another place you do business, the IRS considers
- the relative importance of the activities performed at each place where you conduct business, and
- the amount of time spent at each place where you conduct business
in making the determination.
#2 Must Be Regularly Used
This one usually doesn't trip up too many people, but if you aren't working at home each week, you might not meet this requirement.
#3 Must Be for the Exclusive Use of Your Business
This one messes up people far more often. Exclusive use means that the square footage you're claiming for a home office isn’t used for anything else. It can't double as a guest room, a non-business storage space, a place for the kids to do their homework, etc. The idea is that just because you run your business off your dining room table, you can't deduct your dining room as a home office.
In the past, we claimed the home office deduction for the basement bedroom where we recorded The White Coat Investor podcasts and videos. When we did our renovation a few years ago, we dedicated a significant amount of space to WCI office space (it might actually be a little more than 300 square feet), and we've taken that deduction ever since. But despite the fact that I do hours and hours of work in the kitchen, living room, and dining room, we don't claim that space as a home office due to the “exclusive use” requirement.
More information here:
How Tax Brackets Work for 2024
Tax-Saving Strategies for High-Income Earners
Can Employees Deduct a Home Office?
But what if you're an employee and not a business owner? Can you still deduct a home office? Unfortunately, starting in 2018, the place where this unreimbursed employee expense deduction was taken on Schedule A (itemized deductions) is basically gone. Plus, fewer people are filing Schedule A due to the higher standard deduction (which was $24,800 when I originally wrote this post in 2020 but which has since soared to $27,700 for 2023 and $29,200 for 2024). It was never that great for doctors anyway since it was subject to a floor of 2% of Adjusted Gross Income, a substantial figure for most docs.
Deducting Business Mileage
If you're working at home AND somewhere else, driving between those two locations becomes deductible business mileage rather than non-deductible commuting mileage. I've called it the holy grail of tax deductions. I don't even think there is a rule that you must take a qualifying home office deduction to take the business mileage deduction, but it certainly makes it look less squirrelly.
This deduction is because you are driving between two places of business (the home office and the other place of business) rather than home and the business (commuting). Keep in mind that there is a requirement that the two places of business must be in the same industry. Just because I blog at home before going into a shift at the hospital doesn't mean I can deduct that mileage. Different industries, so it's not business mileage; it's a commute.
Lots of doctors get into a gray area with this. Since they check their email or do some charts at home, some believe they can then deduct their drive to the clinic or hospital. Keep careful records and realize this may or may not hold up in an audit. The key is not having some other place that is the principal place of business. If you're a hospitalist working shifts at four different hospitals, that is going to be a lot easier to argue than if you are an internist who always works in the same clinic.
Renting Your Home to Your Business
You know what the best possible deduction is for a home-based business? Renting your home to your business. This is a deductible expense to your business. And if you do it less than 15 days a year, it is not taxable income to you as an individual. Did you get that? This is FREE MONEY. And it can be a lot of money.
For example, I have business meetings at my home. The space we claim as a home office is too small for those meetings, so we basically have to use the area where my family lives like the dining room. Rather than just giving this space to the business, why shouldn't I charge the business rent? It is certainly allowed.
What is the going rate? That's pretty easy to figure out these days with VRBO or Airbnb. And since I live in a big fancy doctor home very close to some very popular ski resorts, the going rate to rent out my home for a business meeting is actually pretty high—especially when you tack on a cleaning fee, a booking fee, and taxes. Go ahead, see what a single night in your own house would cost you to rent. You'll probably be surprised at how expensive it might be, especially during prime tourist season. This deduction is an order of magnitude larger than what I can take for the home business deduction. But it isn't “either/or.” It's “both.”
Do I have 14 business meetings a year at my house? Absolutely. The minutes of these meetings are well-documented. They last for hours. If I wanted to rent out a hotel suite, conference room, or private house for these meetings, the cost would be substantial. That cost is now a deduction. Would it be a smart business move for my company to rent out a private fancy doctor house to have their meetings? Maybe not, but the IRS does not require you to make smart business moves for your expenses to be deductible.
Don't bother renting your own home for more than 14 days, though. All you're doing then is shifting income from the business return to your individual return. If the business is a pass-thru entity like a sole proprietorship, partnership, or S Corps, you're probably not saving any money there.
Where does this expense go? I'd put it on Part V of Schedule C (lines 48 and 27a) or lines 20 or 19 of Form 1065 or 1120S, respectively.
More information here:
You Should Do Your Own Taxes at Least Once – Here’s How I Do Mine
Miscellaneous Deductions
Of course, don't forget all those office supplies, office furniture, the second phone line, computers, etc. If you use it more than 51% of the time for the business, it's a business expense, although you can only deduct the percentage of the expense that is actually used for business. That is, if you use a $500 chair 60% of the time for business, it's a $300 deduction, not a $500 deduction. And you'd better believe when we bought all the furniture that went into the new WCI office space, it went on the WCI credit card.
If you need help with tax preparation or you’re looking for tips on the best tax strategies, hire a WCI-vetted professional to help you figure it out.
What do you think? Do you take the home office deduction? Why or why not? Ever rented your home to your business? Why not?
[This updated post was originally published in 2020.]
Do these benefits apply to telemedicine as well? Would I be able to work at my PP and then do telemedicine at my home office and rent out this space, and/or deduct this space once over 14 times? Or are meetings only categorized when in a non-provider capacity? thanks Jim
You generally want to be self-employed to take this. But it is possible to take as an employee:
https://www.nolo.com/legal-encyclopedia/can-you-deduct-your-home-office-when-youre-employee.html
Is there anything that’s needs to be registered or declared in order to set up a home office? Or do I simply include it when I go to file taxes?
Haha… I just thought an episode from The Office, where Michael Scott walks out in front of the group and says “I declare bankruptcy”
https://www.youtube.com/watch?v=C-m3RtoguAQ
No, nothing you need to do until you file.
On renting your home for business meetings…I have an S corp PLLC for my side gig and would love to rent my house to the S corp for meetings BUT my CPA says “you can charge the corporation rent, but then you have to personally take the rent payments into income. Works out as a wash.” How does WCI LLC handle this to come out ahead?
It’s not taxable income if it is less than 15 days a year.
https://www.dentaleconomics.com/money/article/16386292/demystifying-the-14day-rent-rule
https://cpaonfire.com/tax-saving-strategies-for-entrepreneurs-part-i-rent-your-home-to-your-business/
Tell the CPA to look it up again.
It’s basically the “Masters Rule” based on the large percentage of the Augusta, Georgia, population who rent out their homes for the Masters golf tournament (almost) every year. I hate to tell you but if your CPA doesn’t know about this pretty common guideline…I would find a different CPA.
Great info WCI. Thanks.
I have a question. You said… “The simplified method also has the advantage of not being recaptured when you sell the home, which is worth something.”
Not sure what the “recaptured” means in this sentence. Can you please explain?
I understand that writing off a home office has implications regarding the taxes when you sell the house. If you claim depreciation (or are able to claim depreciation) then you may have to pay this pack when you sell the house? Is this true? Is this dependent on if you take the simplified deduction or itemize?
Yes recapture is a tax trap not mentioned here as these articles are not written by financial professionals. Would you take medical advice from your CPA?
Oh, an anonymous shot from the cheap seats. Perhaps even from a CPA. Perhaps even from a CPA who has no idea what he is talking about.
# 1 The post DID mention recapture. Let me quote for your convenience:
# 2 As mentioned (twice now), the simplified version is not subject to recapture.
Thanks for playing. If you don’t like what I write, quit reading it. But if you’re going to criticize it in such an inappropriate tone, you probably ought to first make sure you’re right or you end up looking stupid.
thanks for the response. As a clarification on the re-capture, correct me if I am wrong, but the premise is that whatever you depreciate is what affects the basis of the house when you sell it, right?
say you depreciate a 1M house by 2000 each year. So in 10 years you sell the house for 1.2M. The basis of the house is now not 1M but rather 980,000 because of depreciation so when you sell it, you pay taxes on the profit of 1.2M – 980,000 = 220,000.
Now my question is – if your profit is still under 250K (which I believe is tax free), then the depreciation of your home office doesn’t really get re-captured, right?
or if you make an in-kind property purchase that limits taxes on your original house then again your depreciation write off isn’t being recaptured.
is this correct?
Yes, that’s how depreciation works. BUT if you use the simplified method there is no recapture.
Actually, this is incorrect. Any depreciation recapture gets split off and definitely taxed, then the gains left over are only taxed if they are above $250k (single) or $500k (MFJ) assuming you qualify for the full homestead exemption.
Depreciation recapture isn’t a terrible thing though. First, you get an interest free loan (getting a deduction in current dollars and paying a tax with future dollars), and the recapture tax rate is capped at 25%. So if you are in the 32% bracket or higher, you get a rate arbitrage.
I’m not sure we’re talking about the same thing.
This is what I’m talking about:
https://www.irs.gov/businesses/small-businesses-self-employed/faqs-simplified-method-for-home-office-deduction#:~:text=at%20a%20gain%3F-,A.,you%20used%20the%20simplified%20method.
Q20. What effect does using the simplified method have on the requirement to recapture depreciation when the home is subsequently sold at a gain?
A. For taxable years in which the simplified method is used, the depreciation deduction allowable for the portion of the home used in a qualified business use is deemed to be zero. Accordingly, you do not have to recapture any depreciation for taxable years in which you used the simplified method. However, you may have to recapture depreciation for taxable years in which you used the standard method.
I agree that no depreciation recapture is needed when taking the simplified deduction. But that was only part of what Ausdoc asked. He also asked if, when taking the “itemized” home office deduction, depreciation recapture can be avoided if the total gain (depr. recapture plus appreciation) is less than the $250/500k exclusion. The answer is no, depreciation must be recaptured regardless. See IRS Pub 523 Worksheet 3.
Interesting note: home office depreciation gets complicated when the home office is for an S-corp. You are really supposed to put the home office on the balance sheet. But there is language somewhere that says “if you keep very good records and can prove you didn’t take depreciation, you don’t have to recapture it” or something to that effect. My accountant advised me to not take any home office depreciation and to reimburse personal accounts for mortgage interest, property tax, utilities, and maintenance and list those on 1120S. I guess I’ll only know if that was the right thing to do if I get audited after the house gets sold.
I agree with you.
So I could rent my second home to my business when I stay over night in the town where this is located? I come to this town to do outreach and would instead get a hotel if I didn’t have this house still. So I rent it 14 days a year and then stay here but not “rent” the rest of the time?
Sounds pretty squirrelly to me. In general, when your business rents your home it is for a meeting or event, not to stay the night. Better run that one by your accountant.
Are we still able to deduct CME, books, language books/tuition if relevant to the type of medicine we practice?
It depends on whether self employed or not.
Can you clarify more on this one for if you are employed (not self enployed)? For CME type expenses – what if your employer gives CME funding in your benefits? Assuming those can’t be deducted? What about what’s left over after that you pay out of pocket?
And for office supplies like desk, monitors, etc if you are employed can those be deducted?
Employees can’t claim the home office deduction.
Nor can employees deduct CME expenses, that’s why many employers offer CME funds, so those costs can still be paid with pre-tax dollars.
Nor can employees deduct office supplies.
These are all deductions for business owners since they are legitimate business expenses.Your employer can deduct them too if your employer gives them to you to do your job. But you can’t deduct them as the employee.
Hi. I have heard about the 15 meeting rule.. As someone suggested in the comments.. I suppose it is a way to generate some tax free income if you rent the house out 15 times per year? And with that.. I am wondering if there are certain rules to follow when renting out the hosee.. if it includes over night as well. And if so.. would the 15 meeting rule be per calender day or per rental peried, which may be longer than 24 hours. or how is that calculated . I am not trying to bend or break any rules. I just want to more clearly understand the rules around this. I can see how it may be a factor for people Who Air bnb their house or airbnb room(s) or portions of their house out . and by doing so can have all or a portion of that income as tax free personal income?
Yes, you can rent a place out up to 14 days a year and not report that as taxable income. Many business owners, with or without a home office, use this deduction by renting their place out to their business for meetings. In determining a fair price for that deduction, it is reasonable to use AirBNB listings to look up comparables.
Can you rent your second home back to your business as a place to stay, i.e. lodging (instead of getting a hotel) while you are doing locums works at a nearby hospital, or can you only rent your home back to your business for meetings?
You can rent it to your business. Just remember that if you do it more than 14 days a year, it’s taxable income to you. So a deduction for your business and income to you. It all washes out in the end.
Is the limitation of under 15 days per home or per tax return?
Ummmm….good question. Not 100% sure but I think it is per property/home.
What if you want to stop taking the deduction? What do you do–just not list it the next year? I’m a bit tired of making the office exclusive. Essentially half the room is my office, the other half is for personal usage, with a fairly clear demarcation. What this means is the personal side is getting crowded, and the business side has a nice large desk (that I like and want to keep using) that is essentially empty so it can stay 100% business. The deduction just doesn’t seem worth the inconvenience anymore.
Yes, just stop claiming it.
What if you are employed clinically but have done side work like consulting or giving talks where you submitted a w9. Can you deduct home office expenses against that income?
If you’re running a business, yes. So if you’re paid on a 1099, yes. If you’re paid on a W-2, no. Of course, you still have to meet the “exclusive and regular use” rules.
If you’re an owner/employee of an S Corp, and you’ve been reimbursing home office expenses, will depreciation/recapture thing apply to you when you sell your home? (I have not been getting reimbursed for depreciation since I must provide a receipt for “actual expenses”.)
Yes. You should be deducting depreciation since it will be recaptured whether you deduct it or not. You don’t need a receipt for it.
Thanks for clarifying this!
Does the business need to have a contract with yourself when you rent your home for business purposes and if so do you breakdown rent and cleaning fees? Does this need to be anything more elaborate than an invoice?
Yes. Cleaning fees! Good idea. Hadn’t thought about those.
Our contracts are simple- dates rented, amount, purpose. That’s it. Maybe an invoice is enough. Dunno.
Question: do you need to own your home in order to take the 14 day rental deduction? I still live in my childhood home which remains under my dads name. Thanks.
Yes. But your business could pay your dad and he could take 14 days worth of rent tax free. I guess he could gift the money to you at that point.
Not sure if an IRS audit would view that as a step transaction or not.
Hi Jim,
It appears that renting your home to your business is the most powerful strategy here. I’m hoping to gather some clarification.
According to this website:
https://www.dentaleconomics.com/money/article/16386292/demystifying-the-14day-rent-rule
The 14 day rent rule is not applicable to Schedule C practices including sole proprietorships and single member LLCs which I imagine would make a large percentage of us 1099 docs ineligible for the deduction. Is this your understanding as well?
While I couldn’t find anything on IRS.gov that said that, I did find several other reputable websites that make the same assertion- partnerships, S corps, and C Corps only. Not sure what a 1099 doc would use the home for anyway. There has to be a legitimate business use and I don’t think doing charting would cut it.
Thanks. I prospect for my own locums assignments which actually takes considerable time and effort in addition to the management of my business finances and charting. You have a point though, but it sounds like this may be a nonstarter anyway since I file as a sole proprietor.
Thanks so much.
I have a SMLLC with S-corp election. I own the house and it is my primary residence and primary place of business. Can I still do ‘ Line 19 Other (Sch E) – Employee Home Office Reimbursement get reimbursed . Does it have to be max 1500 or can I charge fair rent. For e.g. my house would rent for 3600/month. Can I charge as Employee Home Office Reimbursement 720/m assuming I am using 20%. Annual expenses reimbursement in this case would be 8640.
Then can I also do 14 days rule?
Does this apply if the primary residence is also primary place of business for SMLLC S-Corp? Thanks.
You can charge fair rent. Just recognize that you’re moving money that would be business profit into rental income and there are consequences to that.
However, the real tax break is when you rent it less than 14 days. THAT rental income is totally tax-free. It’s a deduction to the business but not taxable to you. You could probably do the home office deduction in addition to that but some would advise you subtract out the home office square footage when calculating fair rent. The home office deduction allows you to choose between actual expenses of the home multiplied by the square footage of the office divided by the square footage of the home and then recapturing that when you sell or the simplified version which is limited to $1500.
Long-time reader, first-time poster. You wrote the simplified home office deduction goes on line 20 of Form 1065. But that is the Energy Efficient Commercial Building Deduction. Did you mean line 21 – Other Deductions?
My wife and I have a side hustle partnership. Best guidance I could find online was to not include the home office deduction on 1065 at all, and instead list it as a UPE (Unreimbursed Partner Expense) on Schedule E. I’ve done it that way for ~5 years, but it always struck me as strange.
In 2020, when this article was written, the “Other Deductions” was on line 20. In 2024, when this article was republished, the Other Deductions go on line 21.
https://www.irs.gov/pub/irs-prior/f1065–2020.pdf
https://www.irs.gov/pub/irs-pdf/f1065.pdf
Thanks for pointing out the change, I’ll fix it in the article.
I imagine it’s probably fine to have it on Schedule E. Not sure which is “more” correct. Doubt anyone at the IRS cares. Today they announced they’re sending out 125,000 notices to taxpayers making over $1 million who didn’t file a return at all. They’ve apparently got bigger fish to fry.
So does renting out the house for business meetings count if my husband owns the dental office and I’m the only other officer for his Corp? Could we count all the meetings we have talking about business? (Obviously with detailed notes and only up to 14 days)
I don’t think I’d try it for meetings between you and your spouse at your own house. Pigs get fat, hogs get slaughtered principle.
JD, here are a couple of questions you likely the answer to, so thank you in advance:
1) Where is the renting your house for business meetings section in turbotax? Or is it just miscellaneous …
2) If you are pure 1099 and a SP or LLC, etc and you are a telemedicine doc who travels between locations that you work at around the country, can those miles contribute to the mileage for work deduction? Let’s say you take care of relatives in a location and happen to be able to work remotely, and that’s far from your home state/domicile? Is that too sketchy if it is documented? Of course, if you made a few of those trips a year it could be 1000+ miles, etc.
Best to you
1) Depends on the business structure. If sole proprietor, it ends up on schedule so is likely in the section with other business expenses. The first section as I recall from Turbotax but keep in mind I haven’t used Turbotax in 3 years.
2) Business travel and work miles are treated a little differently. More info here: https://www.whitecoatinvestor.com/business-mileage-the-holy-grail-of-tax-deductions/
The primary reason for travel has to be business. You can’t just go to Antarctica, do a little work there, and write off all the mileage to get there. Sorry.
Thanks for the article. I love and respect your work Jim.
I’m a sole proprietor at my side gig, and I’m renting my house (not owner). Apparently using the Augusta rule will not apply unless I convert my business to an LLC (s-corp election). However, this will mean I’ll have to do payroll and have other expenses and complications. I think it is still worth. ChatGPT calculated I’ll be gaining ~$7k. Do you agree? Anything else I am missing?
FYI: W2: $260k. 1099: 90k. Similar Airbnb rent is $1200/day.
$90K of income I typically wouldn’t recommend forming an S Corp. I’m not sure an Augusta rule rental really changes that. What are you using the house you’re renting to do for your business?
W2 jobs don’t mix well with S Corps either.
https://www.whitecoatinvestor.com/why-an-s-corp-doesnt-mix-well-with-a-w-2-job/
I’m conducting business meetings with referral sources (doctors) at home. I understand that W2 jobs don’t mix well with S Corps however, I had ChatGPT make a calculation where I was coming ahead if I do the S corp.
Would you please clarify why you said that the Augusta rule will not apply if I switch my sole proprietorship to an LLC/S corporation?
Thanks
If you’re renting your house to your S corp for a legitimate business reason for 14 days or fewer a year at a fair price, then I don’t see why the Augusta rule wouldn’t apply.