The first step in determining the deduction is making sure that you (and the space) actually qualify for it. You must regularly use part of your home exclusively for conducting business. One of the key words here is "exclusively". This space shouldn't also be your 'spare bedroom' that would be used to accommodate friends and relatives visiting from out of town. Rather, it would need to be a room with a true office setup (no bed). In addition, the business part of your home must be either your principal place of business or the location where you meet with clients or customers in the normal course of conducting business.
Starting in 2013, there are two ways to calculate the home office deduction. One is taking the square footage of space used for the office divided by the total square footage of total home. This calculated percentage would be used for the home office deduction calculation. You would multiply that % by the actual expenses (utilities, water, etc.) to arrive at your home office deduction.
The alternative way to calculate this expense is more straightforward. For 2013 and forward, the IRS is allowing $5 standard deduction per square foot of home used for business (maximum 300 square feet). The maximum deduction would be $1,500. While this is usually not as high as the actual method, there is a reduction on records needed.
Some additional facts to keep in mind when taking the home office deduction are as follows:
- When using the % method, you are allowed to take a portion of depreciation on the home office. Be sure to keep up with this as the amount will need to be used if the home is sold. The depreciation recapture will reduce the cost basis in the home.
- You cannot take depreciation on the home office when using the simplified method.
Here are some helpful links:
As always, contact your tax professional with additional questions.