The home office deduction is a great benefit for home-based businesses. In 2013, more than 3.4 million taxpayers claimed deductions for the business use of a home.
In order to claim the deduction, the IRS requires that the home office be used regularly and exclusively for business, and the limit is tied to the income derived from the particular business. Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees, are still fully deductible.
Self-employed individuals claim the home office deduction on Schedule C, farmers claim it on Schedule F, and eligible employees claim it on Schedule A.
There are two options: the simplified method or the regular method.
- Regular Method
- The home office deduction includes certain costs that you paid for your home. For example, if you rent your home, part of the rent you paid may qualify. If you own your home, part of the mortgage interest, taxes and utilities you paid may qualify. The amount you can deduct usually depends on the percentage of your home used for business.
- Home-based businesses are required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions.
- Simplified Method
- It is designed to reduce the paperwork and recordkeeping burden for small businesses.
- The maximum is $1,500 per year, based on $5 a square foot for up to 300 square feet (make sure you only count the square footage that is used for business).
- Using this method you cannot depreciate the portion of your home used in a trade or business, but you can still claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. (These deductions need not be allocated between personal and business use, as is required under the regular method.)
You only need to complete a short worksheet in the tax instructions and enter the results on the tax return.