If you use your home for business purposes, you may be able to offset your business income with a portion of the costs incurred to maintain your home.
Qualifying for the Deduction
In order to claim the home office deduction, you must meet the following requirements:
Part of your home must be used exclusively for business. If you use a section of your home both for business and for personal use, you cannot claim this deduction. There is an exception to this exclusivity rule if you use part of your home as a daycare facility or to store inventory or product samples.
You must also regularly use your home office for business. If you use this section of your home only occasionally, you cannot claim the deduction even if your office is used exclusively for business.
Principal Place of Business
Your home office must be considered your principal place of business. Your home office will automatically be considered as your principal place of business if you use your home exclusively and regularly for administrative or management activities of your business, to meet patients, clients, or customers, or if you have no other fixed location for your business.
Convenience of the Employer
If you are not self-employed, your home office must also be used for the convenience of your employer. If a home office is used exclusively for the employee’s benefit, no deduction is allowed.
Calculating the Deduction
There are two ways to calculate the home office deduction. One way is to allocate the actual expenses incurred to maintain your home and allocate these expenses to your home office. This is done by calculating the percentage of your home that your office occupies (as determined by square footage) and applying this percentage to the actual costs incurred. Common deductible expenses include: mortgage interest, real estate taxes, rent, depreciation, insurance, utilities, security, and general home repairs. The remaining portion of any mortgage interest or real estate taxes that is not allocated to the home office can be claimed as an itemized deduction.
If keeping records of all the expenses you pay for the upkeep of your home is too burdensome, the IRS also allows taxpayers to claim the home office deduction using the “simplified method”. Under this method, all you need to calculate the deduction is the square footage of your home office. This square footage is multiplied by a flat rate (currently $5 per square foot, up to 300 square feet) to arrive at the deduction amount. When electing this method, all mortgage interest and property taxes may be claimed in full as an itemized deduction.