If you run a business in New York City, there’s a good chance you do at least some of your work from home. With NYC rents and housing costs as high as they are, your home office could save you real money at tax time.
The IRS has clear rules about who qualifies, though, and it looks closely at home office claims. Here’s how it works in plain English.
Who Qualifies for the Home Office Deduction in New York City
There are three basic questions.
1. Is the space used only for work?
This is the most important rule. The space has to be used for your business and nothing else. A desk in the corner of your living room where the family also watches TV doesn’t count. A spare bedroom set up as an office and used only for work does.
It doesn’t have to be a whole room. A clearly separate area of a room can work, as long as you don’t use it for anything personal. In a small NYC apartment, this is where many people run into trouble.
2. Do you use it regularly?
Working there once in a while isn’t enough. It needs to be part of how you run your business week to week.
3. Is it your main place of business, or do you meet clients there?
Your home office qualifies if either of these is true:
- It’s your main place of business. This includes being the main place where you handle the business side of things, like billing, bookkeeping, scheduling, and paperwork. You can do your actual client work somewhere else.
- You regularly meet clients there. If clients come to your home office as a normal part of your business, that counts too.
If you can answer yes to all three, you’re likely in good shape.
What If You Also Rent an Office?
Many New York City business owners pay for an outside office and also work from home. Your office rent is always deductible. Whether you can also deduct a home office depends on what you do at each place.
It usually doesn’t work if you do most of your paperwork and billing at your outside office and just catch up on emails at home at night.
It usually does work if:
- You regularly meet clients at home, or
- Your outside office is only for meetings or client work, and you handle the business side at home
In other words, the home office has to qualify on its own. Having an outside office doesn’t rule it out, but it does make it harder.
Real-Life NYC Examples
A consultant in a two-bedroom apartment on the Upper West Side uses the second bedroom only as an office. She does all her billing and client calls there and travels to clients for meetings. She qualifies.
A graphic designer in a Brooklyn studio works at a desk that’s also where he eats dinner. He doesn’t qualify. The space isn’t used only for work.
An attorney with a Midtown office does all her billing and paperwork there and reviews files at home on weekends. She likely doesn’t qualify. Her main business work happens at the outside office.
A therapist rents a Manhattan office part of the week and sees clients two days a week in a dedicated room at home. She likely qualifies, because clients regularly come to her home office.
If You Rent Your Home
If you rent, you can deduct the business share of:
- Rent
- Electric, gas, and heat
- Renter’s insurance
- Repairs to the office space
For renters, that’s the whole picture. There’s nothing to worry about when you move out.
If You Own Your Home
If you own a house, condo, or co-op, you can deduct the business share of:
- Mortgage interest
- Property taxes
- Homeowner’s insurance
- Utilities
- Repairs
- Condo common charges or co-op maintenance
You may already deduct mortgage interest and property taxes on your personal return. Moving the office share over to your business usually saves you more, because it lowers your business income directly.
Depreciation: An Extra Deduction for Homeowners
Homeowners get one more deduction that renters don’t: depreciation.
Depreciation is a yearly write-off for the wear and tear on the part of your home you use as an office. Because you own the property, the IRS lets you deduct a portion of what you paid for it each year, spread out over many years. It applies only to the building, not the land, and only to the office portion of your home. Co-op and condo owners can take depreciation too.
The Catch When You Sell
There’s a tradeoff. When you sell your home, most of your profit is usually tax-free, up to $250,000 if you’re single or $500,000 if you’re married. The depreciation you took on your home office, however, gets taxed when you sell, at a rate of up to 25%.
Two things to know:
- You can’t avoid it by skipping depreciation. The IRS treats it as if you took it, even if you didn’t. So if you qualify, it makes sense to claim it.
- It’s still usually worth it. You get the deduction every year now, and pay a capped tax on it later, often many years later.
The important thing is to plan for it, so it doesn’t come as a surprise when you sell.
If Your Business Is an S Corp or Partnership
If your business is an S Corp or a partnership, you generally can’t take the home office deduction on your personal return the way a sole proprietor does. Instead, your business pays you rent for using your home office.
It works the same way as paying any landlord. The business pays you rent for the space and deducts it as a business expense. You’re now the landlord, so you report the rent you receive as rental income on your personal tax return.
A few things to know:
- Keep it reasonable and on paper. Charge a fair market rent for the space, have a simple written lease, and have the business pay you on a regular schedule, the same as with any other landlord.
- S Corp owners can deduct very little against the rent. Because you’re also an employee of your S Corp, the IRS limits what you can deduct against rent you collect from it. You can deduct the office share of mortgage interest and property taxes, but generally not utilities, insurance, repairs, or depreciation.
- Partners have more flexibility. For a partnership, you can generally deduct your office expenses, including depreciation, against the rent you receive. Rental income also generally isn’t subject to self-employment tax. If you take depreciation, the tax on it when you sell your home still applies.
The rules work differently for S Corps and partnerships, so this is something to set up with your CPA rather than on your own.
Started Working From Home Partway Through the Year?
That’s fine. You can take the deduction for the months the space was actually used as your office. The same applies if you move. You can claim your old home office for the months before the move and your new one after it.
Common Mistakes to Avoid
Using the space for personal things. If your office doubles as a guest room or a place for the kids to play, it doesn’t qualify.
Assuming working from home is enough. You still need to meet the rules above.
Claiming more than your business earned. The home office deduction can’t push your business into a loss. Any amount you can’t use carries over to next year.
Not keeping records. Take a few photos of your office, note its size, and keep your bills. If clients come to your home office, keep a simple log of those meetings.
S Corp and partnership owners skipping the lease. If your business pays you rent, put it in writing, charge a fair amount, and make the payments on a regular schedule.
How It Helps on Your New York State and NYC Taxes
A home office deduction doesn’t just lower your federal taxes. It reduces your business income, and that lower income carries through to your New York State and New York City tax returns as well. With NYC’s combined state and city tax rates among the highest in the country, every dollar of deductions counts.
The Bottom Line
If you have a space in your home that you use only for work, on a regular basis, the home office deduction can add up to thousands of dollars a year. Renters deduct a share of their rent and utilities. Owners deduct a share of their home costs plus depreciation, and should plan for the tax on that depreciation when they sell. S Corp and partnership owners have their business pay them rent for the space.
If you’re not sure whether your setup qualifies, it’s worth reviewing before year-end.
Meir Spear is a CPA and CFP based in New York City. He specializes in New York City and New York State taxes, working with small business owners on tax planning, entity structuring, and accounting. Schedule a consultation
