Deducting Your Home Office

Deducting Your Home Office

Many self-employed taxpayers use the deduction for having an office for business in their home. They’ve used Form 8829, Office in Home, to figure their deduction, based on the square footage of their home, the percentage of the structure that’s used for business purposes, and other criteria.

And while that formula has worked for many taxpayers, for others it’s been overkill. So the IRS has a much simpler option for figuring a home office deduction.

A Faster, Easier Deduction

The official IRS name for the new method is the safe harbor method. It grants a standard deduction of $5 per square foot of the home used for business purposes – up to a maximum of 300 square feet, or a $1,500 max deduction.

Home Office Details to Remember

You can choose either the simplified calculation or the regular method for any tax year. Not sure which to use? Consult IRS Publication 587, Business Use of Your Home, for more information.

But: Once you pick a method for the Office in Home calculation, you can’t change it later for the same tax year. And the IRS cautions that if you use the simple option one year, then go back to the regular method, you’ll need to calculate the depreciation deduction for the following year using the appropriate optional depreciation table. That's true whether or not you used an optional depreciation table for the first year the property was used for business.

Whichever method you use – safe harbor or the expense method – the area of the home for which expenses are deducted must be used as the principal place of business for the trade or business, or as the place where you meet and deal with patients, clients or customers in the normal course of the trade or business.

Filling Out the Screen

Here’s a short guided tour of the Your Home Office screen.

First, we’ll ask if you have an area that you use exclusively for business, and if so, about the square footage of that area. Next, we ask whether the space is a daycare facility. If the answer is yes, we’ll ask about the square footage for that use and about the total number of hours it’s used that way. If no, we continue on to get the square footage of the entire home.

Now comes the part where the safe harbor method can come into play. If you select the simplified or safe harbor method, you’re done! We’ll calculate the deduction from your entries.

If you click No, you’ll be asked about the expenses related to your home office.

The Expenses Method

If you’re going this route, you’ll be asked to enter any expenses for the entire home, then any that are specific just to your home office space The expenses include:

  • Mortgage interest
  • Real estate taxes
  • Insurance
  • Rent
  • Repairs
  • Utilities
  • Casualty losses
  • Other expenses

Your deduction will be figured from the amount of expenses just for your office, plus a pro-rated percentage of the expenses for the entire home. That percentage is calculated from your office square footage divided by the entire home’s square footage.