Taxes

What Therapists Need to Know About the Home Office Deduction

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January 10, 2023
January 9, 2023
Bryce Warnes
Content Writer
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If you’re a therapist who sees telehealth clients from home, you may be able to claim the home office tax deduction.

However, some of the costs of running your home office—such as utilities and rent—overlap with personal expenses. Deducting them is a bit more complicated than it would be if your office was based outside the home.

By following a few simple guidelines, you can determine the best way to deduct home office expenses and save money on taxes.

Who qualifies for the home office deduction for therapists?

To qualify for the home office deduction, the place you work from needs to be considered a valid home office by the IRS.

The home office deduction is only available to self-employed individuals; if you work for someone else in addition to running your own practice from home, you won’t qualify.

Besides that, the IRS uses three guidelines to determine whether your home office qualifies:

  1. Exclusivity
  2. Regularity
  3. Precedence

Luckily, none of these are as imposing as they sound. When you understand what each guideline means, you’ll be able to set up a home office that qualifies.

Exclusivity

The space should be used exclusively for business activities. 

Keep in mind that “space” doesn’t mean the same thing as “room.” You can use a portion of a larger room as your home office. For instance, if your live-in partner also works from home, they might use one half of a spare bedroom as their office, while you use the other half. 

The important thing is that you use that space only for work. If you spend 30% of your time in your home office running client sessions and taking notes, and the other 70% playing computer games, it doesn’t qualify as a home office. 

Similarly, if your home office doubles as a guest bedroom, it won’t qualify for the home office deduction, since the space is not a dedicated office.

Regularity

You should use your home office on a regular, fairly predictable basis—not occasionally or randomly.

“Regular” doesn’t necessarily mean “frequent.” If you’ve just started your practice, you only have a few clients, and you spend five hours per week using your home office for work, it still qualifies as a home office.

On the other hand, you could work more hours per week, but if you didn’t do so on a regular basis, your home office might not qualify. 

Precedence

Your home office must be the number one place you conduct business.

Many costs associated with running an office for your therapy practice are tax deductible. The IRS doesn’t want you renting a business space outside your home and deducting it from your taxes, then going home to do additional work and deducting additional taxes for your home office space. You need to choose one or the other.

Suppose you run 90% of your therapy sessions remotely, out of your home office. The other 10% you do in-person, subletting another therapist’s office at an hourly rate. In this case, your home office is your primary place of business—you can deduct the cost from your taxes.

Now, suppose the percentages are flipped: You do 90% of your sessions in-person at an office you sublet, and 10% of them remotely, from your home office. In that case, your home office would not qualify, and you could not deduct it from your taxes.

Bottom line: The bulk of your working hours, and the most important tasks you complete as part of running your practice, should take place in your home office.

How to calculate the home office deduction for your therapy practice

You have two options when it comes to calculating the home office deduction: the standard method and the simplified method.

The standard method sets no limit on the size of your home office. The simplified method has a limit of 300 square feet.

Besides the matter of size, depending on your household expenses, either the regular or the simplified method may give you the largest tax deduction.

It’s a good idea to calculate your deduction using both methods, and choose the one that benefits you the most.

Home office deductions using the standard method

To take the home office deduction using the standard method:

  1. Calculate the square footage of your home
  2. Calculate the square footage of your office space
  3. Determine what percentage of your home is office space, based on square footage
  4. Multiply your total qualifying expenses for your home by this percentage

Example: Your home is 2,000 square feet and you use 200 square feet as office space. That's a percentage of 10%. Your total household expenses, including rent, utilities, insurance, and necessary repairs, comes to $3,000 per month. When you multiply $3,000 by 0.10, you get $300. You can deduct the equivalent of $300 per month from your taxes as home office expenses (an annual total of $3,600).

Home office deductions using the simplified method

The home office simplified method lets you deduct $5 per square foot per year from your taxes, based on the square footage of your office space up to a limit of 300 square feet (a maximum deduction of $1,500.)

Example: Your home is 2,000 square feet, and you use 200 square feet as office space. The total monthly cost of maintaining your home is $3,000, or $36,000 per year. With the simplified method, you can deduct an annual total of $1,000 ($5 x 200) from your taxes.

Deductible home office expenses for therapists using the standard method

If you are using the standard method to calculate your deduction, there are two types of home office expenses you can claim:

  • Direct deductions, expenses which pertain 100% to running your home office, and
  • Indirect deductions, expenses which pertain partly to your home office, and partly to the rest of your home

Whether direct or indirect, the expenses you claim as part of the home office deduction using the standard method must not already be part of your business books, and deducted elsewhere as a business expense. 

Direct deductions for your home based therapy practice

One common example of a direct deduction is the cost of home renovations made exclusively to your office space. So long as it isn’t already listed as a deduction on your business books, you can claim it using the standard method.

Indirect deductions for your home based therapy practice

Indirect deductions are for expenses that apply to your entire house, whether you rent it or own it:

  • If you rent your home, you can deduct a percentage of your monthly rent that coincides with the percentage of your home you use as an office
  • You can deduct a percentage of the total cost of utilities that coincides with the percentage of your home you use as an office
  • If you own your home and aren’t already claiming mortgage interest and property taxes on Schedule A, you may claim them as part of your home office deduction.

Keeping records to support your home office deduction

The home office deduction is one of the most easily auditable deductions on your tax return. 

No tax professional can advise you on the likelihood of being audited. As with all tax deductions, it’s best to be prepared for the worst; keep organized receipts for all expenses you claim.

In the event of an audit, the IRS may ask for photos of your home office and the areas around it in order to prove exclusivity.

How to deduct home office expenses on your tax return

If your therapy practice is a sole proprietorship, or an LLC filing as a “disregarded entity,” you report your home office deduction on Schedule C of IRS Form 1040.

If your practice is an S corporation, or an LLC filing as an S corporation, you’ll deduct your home office expenses on IRS Form 1120S.

Finally, if your business is a partnership, or an LLC filing as a partnership, the individual partners deduct their home office expenses on their individual tax returns.

As always, it’s wise to consult with an accountant before claiming any major deductions on your tax return. 

Trying to take advantage of deductions you don’t qualify for, making miscalculations, or failing to keep adequate records could result in hefty fines (and a lot of administrative headaches).

However, if you’ve got an accountant working for you and you’re ready to explore the world of deductible expenses, check out our complete list of tax deductions for therapy practices.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post.

Bryce Warnes is a West Coast writer specializing in small business finances.

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