If you qualify for the home office deduction, you may be able to deduct certain expenses related to your business use of your home. These expenses generally fall into two categories: direct expenses and indirect expenses.
Understanding the difference can help you correctly report your expenses and maximize your deduction.
Direct Expenses
Direct expenses are costs that apply only to the part of your home used for business.
For example, if you pay to repair, paint, or improve a room that is used exclusively for your business, those costs are considered direct expenses. Because the expense benefits only your business area, the full business-related cost may be deductible.
Common examples of direct expenses include:
- Painting a home office
- Repairing the flooring in your business workspace
- Replacing a window in the room used exclusively for business
Indirect Expenses
Indirect expenses are costs for maintaining and operating your entire home. These expenses benefit both your personal living space and your business area.
Because these expenses apply to the whole home, only the business-use portion is generally deductible.
Common examples of indirect expenses include:
- Homeowners or renters insurance
- Utilities such as electricity, water, and gas
- General home maintenance and repairs
- Mortgage interest or rent (when applicable to the home office deduction)
- Property taxes
A Simple Example
Let's say you use 10% of your home's square footage as a qualified home office:
- If you repaint only your home office, that's a direct expense and may be fully deductible.
- If you pay your monthly electric bill, that's an indirect expense, and generally only 10% of the cost would be considered a business expense.
Knowing whether an expense is direct or indirect helps ensure your home office deduction is calculated correctly and can reduce the chance of reporting errors on your tax return.