Home Office Deduction for Self-employed American Expatriates

By ZM Ishmurzina

Americans living abroad are eligible to claim multiple business expenses when they start a new business. Earlier we discussed self-employed taxes assessed on American expatriates. The purpose of this article is to understand home office deduction on overseas tax returns.

This is the latest email from one of our clients, American expatriates living abroad. “I live in the UK and did not have a space at home exclusively used for business. Can I still claim home office deduction on overseas tax returns?”

Let’s review the key requirements to claim Home Office Deduction.

  • Exclusive test. In order to claim a deduction for a home office on overseas tax returns, self-employed American expatriates must use a specific area of home exclusively and regularly for business. For example, it might be a room or any other identifiable space. However, if American expatriates use this room for work and recreation, then they cannot claim the office deduction.
  • No other fixed location. American expats can claim home office deduction on overseas tax returns, if they do not have any other fixed location to conduct administrative or management activities.
  • Exceptions. The exclusive use test requirement is waived for American expatriates if the space is used for storage of product samples and inventory or as a daycare facility.
  • List of deductions. In addition to mortgage interest and real estate taxes, American expatriates can claim additional expenses if they use a home office. Per the IRS, some of the expenses are:
  1. Depreciation
  2. Insurance
  3. Repairs
  4. Security system
  5. Utilities and services
  6. Rent for the use of property for business

It is important to note that unrelated expenses cannot be deducted. For example, lawncare or expenses for painting of a room not used for business cannot be deducted. It is important to determine a business part of the expenses for operating the entire home.

  • Business percentage. The amount of the office deduction is determined by the business percentage. In order to determine the business percentage, American expats must calculate a ratio of home office size to the whole house on overseas tax returns. For example, if the total size of house is 1000 sq.ft and a home office is 200 sq.ft, then the business percentage is 20%.
  • Limit of home office deduction. American expatriates can claim office deduction up to the amount of net business income that is calculated as a difference between the gross income and total business expenses.
  • Form 8829, Expenses for Business Use of Your Home must be used by American expatriates to determine the amount of office deduction.
  • Home office deduction claimed by employees. Special rules apply if an employee wants to claim the office deduction. The key rule is that a home office must be for the employer’s convenience.

Conclusion

American expats must carefully review the requirements before they claim self-employment expenses and office deduction on US expat tax returns. The IRS actively audits self-employed individuals so it is important to consult an expat tax CPA that provides international tax services. International tax experts at Artio Partners can be contacted here.