HOME OFFICE DEDUCTION

Overview

The home office deduction allows taxpayers to deduct certain expenses related to the business use of their home. This deduction can be calculated using either the Actual Expenses Method or the Simplified Method. Below is a detailed guide on how to calculate the home office deduction using both methods.

Qualifying for the Deduction

To qualify for the home office deduction, the taxpayer must use part of their home:

1. Exclusively and regularly as their principal place of business.
2. Exclusively and regularly as a place where they meet or deal with patients, clients, or      customers in the normal course of their trade or business.
3. In connection with their trade or business if it is a separate structure not attached to      their home.
4. On a regular basis for certain storage use.
5. As a daycare facility.

Exclusive Use Requirement

The area used for business must be used exclusively for business purposes. Exceptions to this rule apply to storage of inventory or product samples and daycare facilities.

Methods to Calculate the Deduction

1. Actual Expenses Method

This method involves calculating the actual expenses incurred for the business use of the home. These expenses are divided into direct and indirect expenses.

Steps to Calculate Using Actual Expenses:

1. Determine Business Percentage:
   • Area Method: Divide the area used for business by the total area of the home.
   • Number of Rooms Method: Divide the number of rooms used for business by the       total number of rooms in the home if the rooms are approximately the same size.

1. Calculate Direct Expenses:
   • Direct expenses are those that benefit only the business part of the home (e.g.,       painting or repairs in the office area).

1. Calculate Indirect Expenses:
   • Indirect expenses are for keeping up and running the entire home (e.g., insurance,       utilities, general repairs). Multiply these expenses by the business percentage.

1. Deductible Expenses:
   • Mortgage Interest and Real Estate Taxes: Deduct the business portion of       these expenses.
   • Utilities and Services: Deduct the business portion of these expenses.
   • Depreciation: Calculate depreciation for the business part of the home.

1. Limit on Deduction:
   • The deduction is limited to the gross income from the business use of the home minus       the sum of the business part of expenses you could deduct even if you did not use your home for business and the business expenses that relate to the business activity in the home but not to the use of the home itself.

Example Calculation:

• Home office is 200 square feet in a 1,000 square foot home (20% business use).
• Total annual expenses: $10,000 (including mortgage interest, utilities, etc.).
• Business portion of expenses: $2,000 (20% of $10,000).

2. Simplified Method

The simplified method allows a standard deduction based on the square footage of the home office.

Steps to Calculate Using Simplified Method:

1. Determine Allowable Area:
   • The allowable area is the smaller of the actual area used for business or 300 square feet.

1. Calculate Deduction:
   • Multiply the allowable area by $5 per square foot.

1. Gross Income Limitation:
   • The deduction is limited to the gross income derived from the business use of the home       minus the business deductions that are unrelated to the use of the home.

Example Calculation:

• Home office is 200 square feet.
• Deduction: 200 square feet x $5 = $1,000.

Recordkeeping

Taxpayers must maintain records to substantiate the business use of the home, including:

• The part of the home used for business.
• The exclusive and regular use of the home for business.
• The depreciation and expenses for the business part of the home.

Forms and Worksheets

• Form 8829: Used to calculate and report the home office deduction using the Actual Expenses Method.
• Simplified Method Worksheet: Used to calculate the deduction using the Simplified Method.

Additional Resources

• Publication 587: Provides detailed information on the home office deduction.
• Interactive Tax Assistant: Available on IRS.gov to help determine eligibility and calculate      the deduction.