If you're a business owner and use a home office exclusively for business purposes, you can deduct a portion of the cost of operating your home as a business expense. But you don't qualify for this deduction if you're an employee and work at home, even if your employer requires that you work at home.
Also, the home office deduction can be complex. You need to keep good records of your home expenses, allocate the expenses of operating your home between business and personal uses, and complete a special IRS form, Form 8829. Lots of people who qualify for the deduction don't take it because they don't think it's worth the trouble.
But in a rare move to simplify life for taxpayers, the IRS created a simplified optional home office deduction back in 2013.
Using this optional method, you simply deduct $5 for every square foot of your home office. But the deduction is capped at $1,500 per year. So, it can only be used for offices up to 300 square feet.
Using the optional method relieves you from having to keep records of your home office expenses such as utilities, rent, mortgage payments, real estate taxes, or casualty losses. And you don't have to complete Form 8829.
Homeowners using the square footage method can't claim a depreciation deduction for their home office. But they can claim allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A. These deductions don't have to 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.
It's important to understand that all the regular rules for qualifying for the home office deduction still apply even if you use the optional method. To qualify, you must meet any one of the following requirements:
Is it a good idea to use the simplified home office deduction? Only if the deduction you could obtain using the regular method isn't much more than $1,500.
Most people with home offices, particularly those who rent their homes, can qualify for a home office deduction much larger than $1,500. For example, a person with a 100-square-foot home office who pays $2,000 per month in rent and utilities would qualify for a $500 deduction using the optional method (100 sq. ft. x $5 = $500). If the home office took up 10% of the home, the renter would get a $2,400 deduction using the regular method (10% x $24,000 = $2,400). The inability to deduct depreciation doesn't make the optional method so great for homeowners either.
If you're thinking about using the optional method, you should figure out your deduction using both methods and use the method that gives you the largest deduction. Doing the required calculations and filling out the form can be challenging, but will be much easier if you use tax preparation software.
Also, the regular method requires more recordkeeping than the optional method, but you probably keep these types of records anyway.
If you have questions about the simplified home office deduction or any other deductions, contact a tax lawyer.