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| Self-employed taxpayers have been more or less familiarized with the home office deduction throughout the years. But in the last decade or so, an increasing number of telecommuters who use part of their home as their office have taken advantage of this deduction as well. |
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 In tax year 2011, the most recent year for which figures are available, some 3.3 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction) totaling nearly $10 billion.
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This is probably one of the reasons why, as of tax year 2013, the IRS decided to provide an alternative simplified method to determine your expenses for business use of your home. |
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| First of all, you should know that, no matter the method you use to deduct these expenses, you still need to qualify for the home office deduction. |
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| To qualify to deduct expenses for business use of your home, you must use part of your home: |
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- Exclusively and regularly as your principal place of business (defined later),
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- Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
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- In the case of a separate structure which is not attached to your home, in connection with your trade or business,
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- On a regular basis for certain storage use,
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| Additional tests apply for employee use. If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. You must meet the tests mentioned above plus: |
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- Your business use must be for the convenience of your employer, and
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- You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.
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 If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home. |
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| The term “home” includes a house, apartment, condominium, mobile home, boat, or similar property which provides basic living accommodations. It also includes structures on the property, such as an unattached garage, studio, barn, or greenhouse. However, it does not include any part of your property used exclusively as a hotel, motel, inn, or similar establishment. |
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| If you use the actual expense method, the home office deduction includes certain costs that you paid for your home. The amount you can deduct usually depends on the percentage of your home used for business. |
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| If you meet the IRS' requirements for claiming the Home Office deduction on your tax return, you may be able to deduct a percentage of: |
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- Your real estate property taxes on your home;
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- Your rent payments if you are not a home owner;
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- Homeowners or Renter's insurance;
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- Depreciation on your home (if you own);
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- Painting and repairs. (Permanent improvements are added to the basis of your home for calculating depreciation and you can then recover these if you claim deprecation as part of your Home Office deduction.)
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| Beginning with 2013 tax returns, you may be able to use the simplified option to claim the home office deduction instead of claiming actual expenses. Under this method, you multiply the allowable square footage of your office by a prescribed rate of $5. The maximum footage allowed is 300 square feet. The deduction limit using this method is $1,500 per year. |
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| If your gross income from the business use of your home is less than your expenses, the deduction for some expenses may be limited. |
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| Normally, 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. |
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| Instead, taxpayers claiming the optional deduction need only complete a short worksheet in the tax instructions and enter the result on their return. |
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 To figure your deduction for the business use of a home using the simplified method, you will need to know the following information for each qualified business use of the home: |
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- The allowable area of your home used in conducting the business. If you did not conduct the business for the entire year in the home or the area changed during the year, you will need to know the allowable area you used and the number of days you conducted the business for each month.
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- The gross income from the business use of your home.
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- The amount of the business expenses that are not related to the use of your home.
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- If the qualified business use is for a daycare facility that uses space in your home on a regular (but not exclusive) basis, you will also need to know the percentage of time that part of your home is used for daycare.
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| To figure the amount you can deduct for qualified business use of your home using the simplified method, follow these 3 steps: |
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- Multiply the allowable area by $5 (or less than $5 if the qualified business use is for a daycare that uses space in your home on a regular, but not exclusive, basis).
- Subtract the expenses from the business that are not related to the use of the home from the gross income related to the business use of the home. If these expenses are greater than the gross income from the business use of the home, then you cannot take a deduction for this business use of the home.
- Take the smaller of the amounts from (1) and (2). This is the amount you can deduct for this qualified business use of your home using the simplified method.
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| Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees, are still fully deductible. |
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| Self-employed individuals claim the home office deduction on Schedule C Line 30, farmers claim it on Schedule F Line 32, and eligible employees claim it on Schedule A Line 21. |
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| Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can 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. |
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 You can find further details on the home office deduction and the new option in Publication 587, Business Use of Your Home, posted on the IRS website. |
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| To make sure you follow all the IRS rules and regulations for the home office deduction, as well as for all your dealings with the IRS, you should enroll help from a tax professional. |
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