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The home office business deduction lets qualifying taxpayers who operate from a home office write off some expenses connected to the portion of their house used for business. The space should be the main place of business (under IRS Code §280A) and be used only and consistently for businesses to qualify.
Requisites:
1. Exclusive and Regular Use: The area has to be used just for business, free of personal activity. Not eligible are occasional business use or mixed-use areas.
2. Principal Place of Business: Usually, this deduction is applicable if the main site of the company or where significant business operations take place is the home office.
Deduction Methods:
1. Simplified Method: Deduct, up to a limit of 300 square feet, $5 per square foot of office space for a maximum deduction of $1,500. (Revenue Procedure 2013-13).
For example, a freelance designer sets aside 200 square feet of space just for their design firm. Under the simpler approach, they could write off $1,000 (200 square feet times $5).
2. Actual Expense Method: Prorated by the percentage of the house used for business, figure actual expenses including rent, utilities, mortgage interest, property taxes, and depreciation.
For example, a freelancer has a home of 1,500 square feet and uses a room of 300 square feet as a home office, so the business use of the home is (300/1500)x100% = 20%. Considering all household expenses for the year are $10,000, he could write off $2,000.
It’s important to know that employees can’t take this deduction unless they are working from home under §280A(c) if their company requires it and they do not rent office space outside of their house.
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