Home office deduction: who qualifies and how to calculate it

Who qualifies?

You must use a specific area of your home:

• Regularly, meaning on a continuing basis, not occasionally, and
• Exclusively for your business. A spare room used only as an office qualifies. A dining table used for work in the day and family meals in the evening does not.

The space must also be one of the following: your principal place of business; a place where you meet clients or customers in the normal course of business; or a separate structure, such as a detached studio, used for the business.

A home office counts as your principal place of business if you use it for administrative or management activities and have no other fixed location where you do substantial amounts of that work. So a contractor who works at clients' sites but does all the invoicing and scheduling from a home office can qualify.

Two exceptions to exclusive use apply: space used regularly to store inventory or product samples, and space used for a daycare business.

How do the two methods compare?

How is the regular method worked out?

Divide the office area by the home's total area to get the business percentage. A 150 square foot office in a 1,500 square foot home is 10%. Apply that to indirect costs for the whole home, such as rent, utilities and insurance, and add direct costs of the office itself, such as painting it. Homeowners also depreciate the business share of the home. The deduction cannot create a loss from the business; the excess carries forward.

The regular method is calculated on Form 8829.

Which method gives more?

A renter pays $24,000 a year in rent and $3,600 in utilities and insurance, and uses 150 square feet of a 1,500 square foot home. The regular method gives 10% of $27,600, or $2,760. The simplified method gives 150 x $5, or $750. The regular method is worth more here, at the cost of more paperwork. You can choose each year.

Who cannot claim it?

Employees working from home for an employer cannot deduct home office costs on their personal return. The deduction is for self-employed people and business owners. An S corporation owner-employee is treated as an employee, so the company reimburses the home office costs under an accountable plan instead, and deducts the reimbursement.

S corporation owners can be reimbursed instead. See accountable plans.

What records should you keep?

A floor plan or measurements, photos showing the space is used only for business, and bills for rent, utilities and other costs. See deductible business expenses and Schedule C.

This guide is general information. It is not tax or legal advice for your situation.