Home office deduction: simplified vs regular method

The home office deduction lets you take part of the cost of your home off your business income. It is for people who work for themselves and use part of their home for the business.

There are two ways to work it out. The simplified method is $5 for each square foot of office, up to 300 square feet. The regular method uses a share of your real home costs. You can choose the method again each year.

The short version

• The space must be used only for business, and regularly (IRS, Publication 587).
• Employees cannot take it. It is for the self-employed (IRS).
• Simplified method: $5 per square foot, up to 300 square feet, so $1,500 at most.
• Regular method: your office’s share of rent or mortgage interest, utilities, insurance and repairs, figured on Form 8829.
• The deduction cannot be more than the income from the business use of your home, less other business expenses.

Words to know

• Exclusive use: a specific area of your home is used only for the business. It can be a room or a clear part of a room. It does not need a wall.
• Regular use: you use it for business all the time, not now and then.
• Principal place of business: your main place of business. A home office counts if you do your admin work there and have no other fixed place where you do much of it (IRS).
• Direct cost: a cost for the office only, such as painting it.
• Indirect cost: a cost for the whole home, such as rent or electricity.
• Depreciation: for owners, a yearly deduction for wear on the business part of the home.

Does your space qualify?

A guest room with a desk fails if guests sleep there. A kitchen table fails because the family eats there. A corner with a desk and shelves, used for nothing else, can pass.

The space must also be your principal place of business, or a place where you meet clients in the normal course of business, or a separate building used for the business (IRS).

The simplified method

Multiply the office’s square feet by $5, up to 300 square feet (IRS).

• There is no depreciation, and no depreciation recapture when you sell your home for those years.
• If you itemize, you still claim your mortgage interest and property tax in full on Schedule A.
• If the income limit cuts your deduction, the extra is lost. It cannot be carried to another year (IRS FAQ).

The regular method

First, divide the office’s area by the home’s total area. A 150 square foot room in a 1,000 square foot home is 15%.

Then sort your bills. Deduct direct costs in full. Deduct your business percentage of indirect costs. Owners also add depreciation. The IRS says depreciation is recaptured on the gain when you sell the home (IRS). If you own and plan to sell, ask a tax professional first.

With this method, an amount over the income limit can carry to a later year in which you use the regular method (IRS FAQ).

An example

Maya is a freelance designer. (She is an example, not a real person.) She rents a 1,000 square foot apartment. She uses a 150 square foot room only for work. Her profit is well above the deduction, so the income limit does not affect her.

Simplified method: 150 × $5 = $750.

Regular method:

The regular method gives Maya $3,365 more. It also lowers her self-employment tax, because it lowers her profit. For a renter with a real office, the regular method often wins. Try your own numbers in the home office deduction calculator.

A Righto tip

Do not put your full rent in a business expense category. Only the home office share is deductible, and you figure it at tax time. In Righto, a free accounting app for Mac, give a home bill paid from the business account the Owner Draw category. Then your Profit and Loss report shows your true business profit, which the income limit needs. See separate business and personal finances.

Common questions

Can I take it if I also have an office somewhere else? Sometimes. It can still qualify if you meet clients there regularly or it is a separate building used for the business.

Can I deduct my mortgage payment? Not the part that pays back the loan. Under the regular method you deduct the business share of mortgage interest and property tax, plus depreciation.

Can I switch methods? Yes. You may choose either method for any tax year (IRS).

What to do now

1. Check that the space is used only and regularly for work.
2. Measure the office and the whole home.
3. Add up a year of rent or mortgage interest, utilities and insurance.
4. Multiply that total by your office percentage.
5. Compare it with square feet × $5, and use the larger one.

Righto is free, easy to use and needs no account.

Sources

• Publication 587, Business Use of Your Home, IRS
• Simplified option for home office deduction, IRS
• FAQs: Simplified method for home office deduction, IRS