Factors Affecting Deduction Amount

Once you've determined that you qualify for the home office deduction, you can determine the dollar amount that you can deduct. You can either choose to use the simplified method for computing your home office deduction, or you can choose to use the regular method.

Regardless of what method you use, some business owners will find that their home office deduction is limited by their business income. The home office deduction, plus all your other deductible business expenses, cannot exceed your business income for the year. In other words, the home office deduction cannot be used as a tax shelter to offset other income you (or your spouse) may have.

Regular Method

The amount computed using the regular method depends on a surprisingly large number of factors. But don't be alarmed - we'll explain them all to you.

First, you need to know what you spent for each component of the home office deduction:

• rent, if you don't own the home
• mortgage interest and real estate taxes, if you own the home
• depreciation, if you own
• insurance, utilities and services, repairs, and decorating, whether you own or rent
• casualty losses, whether you own or rent

Of course, for all these expenses, you can only deduct the portion that pertains to your home office, not the full amount that applies to the entire residence. There are two factors to consider in determining the "home office portion:"

• space: the size of the area that was used
• time: the portion of the year that the home office was used, if not the entire year

Simplified Method

The simplified method provides eligible taxpayers an easier path to claiming the home office deduction. The regular method generally requires you to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction simply multiple the square footage used for business purposes by a fixed dollar amount, currently set at $5.

Though homeowners using the simplified method cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method. Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

However, restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the simplified method.

© 2024 Wolters Kluwer. All Rights Reserved.