The home office deduction is one of the most valuable yet misused tax deductions available through the American tax code. Both employees and self-employed persons are able to use this deduction, but it is important to understand the rules that govern how much a person is able to take as their deduction.
The following rules are in accordance with the IRS website.
To start, in order to claim the home office deduction on your residence, you have to use a designated part of your home exclusively and regularly for at least one of the following reasons:
Your primary place of business as a location to meet or deal with patients or clients in the normal functioning of your business.
The rules state that this area can be anywhere on your property, including your home or an unattached building. A separate building such as a shed or barn can count, but so can an office that is located inside your home.
The property must be used on a regular basis and used exclusively for the purposes of your business. Areas that are used for storage, rental, or as a daycare-facility are only required to be used for these purposes regularly but not exclusively, but this is the only exception to this rule. All other areas that are being claimed for this deduction must only be used for the business.
For example, a person who operates a daycare business may claim the rooms that are used by the children they care for, even though these areas are used by the family after daycare hours are over. Someone who is using a home office for a bookkeeping business, however, is not allowed to also use that space for paying personal bills or any other non-business activity.
In general, the amount you are able to deduct depends on the percentage of your home used for business. To calculate this, measure the total square footage of the area of your home that is used for business. Divide this number by the total square footage of the indoor area of your property. If you use outdoor areas of your property for storage, then you will need to use the total square footage of your entire piece of property.
Take this percentage and multiply it by the total amount you spend on utilities, mortgage, and insurance for your home. Do not include property taxes, since the total amount of these is deducted elsewhere on your tax form. The resulting number is the amount that you are allowed to deduct from your business profits or salary.
Of course, if your profits do not exceed the amount of this deduction, you will not be able to deduct the full amount that you paid for these expenses. There are some exceptions to this if you are spreading out taxes over several years. If you are a business owner, use Form 8829, titled Expenses for Business Use of Your Home. Report the deduction you calculate on this form on line 30 of Form 1040 Schedule C, titled Profit or Loss From Business.