Home Office Deduction: A Comprehensive Guide for Doctors

For many self-employed physicians and medical professionals, the concept of a home office has become increasingly relevant, especially with the rise of telemedicine and administrative duties doctors can perform in the comfort of their homes.

Claiming the home office deduction can provide tax savings for doctors who manage their practices or work from home regularly, but it’s essential to understand the rules.

Here’s what you need to know to maximize this potential tax break.

What’s the home office deduction?

The home office deduction allows individuals who use part of their home for business purposes to deduct certain expenses related to using their home on their tax return. This can include a portion of rent or mortgage interest, utilities, real estate taxes, insurance, and maintenance costs.

Who qualifies for the home office tax deduction?

The IRS has two main home office deduction rules:

  1. Regular and exclusive use. The space must be used regularly for business activities and exclusively to conduct business. As a physician, this could mean a designated space where you manage patient records, conduct telehealth sessions, or handle administrative tasks.
  2. Principal place of business. Your home office must be your principal place of business or where you meet patients, clients, or customers in the normal course of your business. For doctors who split their time between a hospital, clinic, and home office, the home office must be used for substantial administrative or management activities with no other fixed location where you conduct such activities.

Another requirement is that only self-employed people and independent contractors can claim the home office deduction. Currently, employees cannot deduct home office expenses. Unreimbursed employee expenses used to be deductible as miscellaneous itemized deductions. However, that option was eliminated by the Tax Cuts and Jobs Act of 2018 (TCJA).

Your home office space doesn’t have to be a separate room. For example, you could designate a desk in the corner of a spare bedroom or living area as your home office if you use that space regularly and exclusively for business.

Calculating the home office deduction

You have three options for calculating home office deductions: the simplified method, the actual expense method, and the number of rooms method.

Simplified method

The simplified method allows a deduction of $5 per square foot of the home used for business, up to 300 square feet. The benefit of this method is it simplifies record-keeping.

For example, if you use a 200-square-foot room as an office to consult with patients online, using the simplified method, your home office expense deduction would be 200 square feet x $5 = $1,000.

Actual expense method

If you opt for the actual expense method, you must keep detailed records of all eligible home office expenses. Then multiply those expenses by the percentage of your home’s square footage used for business. This method can provide a larger deduction if your actual expenses are high and well-documented.

For example, if your home office represents 10% of the home’s total square footage, and your annual expenses (mortgage interest, utilities, etc.) total $15,000, your deduction would be 10% of $15,000 = $1,500.

Number of rooms method

This method works best when the rooms in your house are all roughly the same size, which isn’t common in modern homes. 

You add up the number of rooms in your home, not including bathrooms or hallways. Then, divide the number of rooms used for business by the number of total rooms in your home. 

For example, if you have nine rooms in your home and use one for a home office, divide one by nine to get your percentage deduction of 11.1%. You can deduct 11.1% of your qualifying home expenses.

This method, generally, results in a higher percentage of business use for your home but only if the layout of your home qualifies as similar sized rooms.

Which Home Office Expenses Can I Deduct?

If you opt to deduct actual expenses instead of using the simplified method, your deductible expenses fall into two categories:

Direct expenses

Direct expenses are costs directly related to your home office, such as repairs or maintenance affecting the home office exclusively.

For example, if you repaint your home office and install new window coverings, these costs count as direct expenses and are 100% deductible.

Indirect expenses

Indirect expenses are costs for maintaining and running your entire home that benefit the office space. This includes:

  • Mortgage interest or rent
  • Property taxes
  • Utilities
  • Home internet
  • Homeowners insurance
  • General repairs and maintenance
  • Homeowners association dues
  • Pest control
  • Home depreciation

Your ability to deduct indirect expenses is limited based on the square footage of your home office relative to the whole house.

You may have other expenses unrelated to your home office, such as lawn care or painting a room designated for personal use. These are not deductible.

How to claim the home office tax deduction

How you deduct your home office expenses depends on your business structure.

Sole proprietors and single-member LLCs report their home offices on Form 8829 “Expenses for Business Use of Your Home Office” that flows through to your Schedule C (IRS Form 1040) as part of their personal tax return.

Partners in a partnership and members of multi-member LLCs deduct home office expenses and other unreimbursed business expenses on Page 2 of Schedule E, which is attached to their Form 1040.

S-corp and C corp shareholders can’t deduct home office expenses, as they are employees of the business. However, the corporation can pay shareholders rent for their home offices under an accountable plan for employee business expense reimbursement. The reimbursement can be monthly, quarterly, or annually to the employee. Then, the corporation deducts those reimbursements as a business expense.

Navigate home office deduction complexities with a trusted advisor

Tax laws can be complex, so it’s important to work with a tax professional who understands the specifics of a medical practice and can ensure you maximize your deductions legally.

Cerebral Tax Advisors can help you determine whether your home office meets the exclusive use test, whether you’ll benefit more from the regular or simplified deduction method, and deal with any IRS challenges.

Check out our ROI page to see if you’re a good fit for a complementary tax analysis. Understanding and correctly applying the home office deduction can reduce taxable income, leading to meaningful tax savings. 

Home office deduction frequently asked questions

Claiming the home office tax deduction can be complex for self-employed physicians and other medical professionals. To help you make sense of this potential tax break, here are answers to a few frequently asked questions.

Can doctors claim home office deductions?

Yes, doctors can claim home office deductions if they use part of their home exclusively and regularly for administrative or management activities of their medical practice, for telehealth appointments, or for meeting with patients, and there is no other fixed location where they perform these tasks. This deduction applies whether they are self-employed or part of a partnership, as long as they meet the IRS criteria for home office use.

Does the home office tax deduction increase my audit risk?

Many people avoid claiming the home office deduction even though they qualify because they hear it increases their chances of an Internal Revenue Service (IRS) audit. This isn’t necessarily true.

The IRS uses software known as the Discriminant Inventory Function (DIF) to look out for red flags that could signal tax fraud, and those anomalies are grouped by profession. 

This means the DIF compares your return to other taxpayers with similar profiles and could select your return for audit if you claim unusual or unusually large deductions.

For example, say the average doctor claims they use 10% of their home’s square footage for business purposes. If you claim 50% of your home for business use, your return might get flagged as an anomaly, increasing your risk of audit.

This doesn’t mean you should avoid claiming a legitimate tax deduction. You just need to make sure your deduction is reasonable and well-documented.

What documentation do I need to keep?

Keep detailed records of the square footage of your home exclusively used for business versus the home’s total square feet.

If you use the regular method to claim the deduction, you must keep itemized receipts for all direct and indirect expenses. This documentation might include:

  • The Form 1098 from your mortgage company showing the interest and property taxes you paid during the year
  • Detailed utility bills
  • Itemized receipts for repairs and maintenance expenses
  • Canceled checks for homeowners association dues and pest control fees

You can keep these receipts in digital form rather than paper as long as you can produce them in the event the IRS decides to audit your tax return.

Avoid inflating expenses or claiming personal expenses as business deductions.

Can I deduct my home internet as a business expense?

Yes, if you use your home internet service for business purposes, you can deduct the business-use portion of your monthly service fee.

While some people simply lump home internet expenses in with other utilities, we recommend deducting them separately for a larger deduction.

For example, say you work from home full-time as a telehealth physician but only claim 10% of your qualifying home expenses. Chances are, you use more than 10% of your internet for business—perhaps as much as 80%.

Separating those costs from utilities allows you to deduct a more accurate (but still reasonable) percentage of your internet expenses.