Can I take a home office deduction?

Home office deduction

With a growing number of business owners now working from home, many may qualify for the home office deduction, also known as the deduction for business use of a home.

Usually, a business owner must use a room or other identifiable portion of the home exclusively for business on a regular basis. Exceptions to the exclusive-use standard apply to home-based daycare facilities and to portions of the home used for business storage, where the home is the only fixed location for that business.

Those eligible can figure the deduction using either the regular method or the simplified method.

To choose the regular method, fill out and attach Form 8829, Expenses for Business Use of Your Home. In general, this form divides the expenses of operating the home between personal and business use. Direct business expenses are fully deductible. On the other hand, the business portion of indirect expenses, such as real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance and repairs, is figured on this form, based on the percentage of the home used for business.

Alternatively, instead of filling out the 44-line Form 8829, business owners can choose the simplified method, based on a 6-line worksheet found in the instructions to Schedule C, the tax form for sole proprietors. This method has a prescribed rate of $5 a square foot for business use of the home. The maximum deduction is $1,500, based on business use of at least 300 square feet.

Though homeowners choosing the simplified option cannot depreciate the portion of their home used for business, they can still claim allowable home mortgage interest, real estate taxes and casualty losses as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method. Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees, are still fully deductible.

Under both the regular and simplified methods, business expenses in excess of the gross income limitation are not deductible. For more information about this limit along with other details on the home office deduction and both methods for figuring it, see Publication 587, Business Use of Your Home.