July 15, 2022
If you use part of your home exclusively and regularly for conducting business, you may be able to deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation for the business use of your home. You need to figure out the percentage of your home devoted to your business activities, utilities, repairs, and depreciation. The home-office deduction is available for homeowners, renters, and applies to all types of homes.
Requirements to Claim the Home-office Deduction
There are two basic requirements for your home to qualify as a deduction:
1. Regular and Exclusive Use.
You must regularly use part of your home exclusively for conducting business and you regularly meet with your customers, clients, or patients at your premises.
2. Principal Place of Your Business.
You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. For example, if you have in-person meetings with customers, clients, or patients in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business.
However, there are some important limitations. Occasional meetings in your home do not qualify. Similarly, telephone calls to customers, clients or patients are not enough. Furthermore, the area of your home must be used exclusively for business. For example, doing business in your study room that is used to read novels and listen to music as well as meet clients will not qualify.
To refer; IRS Publication 587 (2021) https://www.irs.gov/publications/p587
Calculating deduction expense
There are two methods for calculating deduction expense: regular method and simplified option.
Regular Method Generally, deductions for a home-office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities. Taxpayers using the regular method (required for tax years 2012 and prior), instead of the simplified option, must determine the actual expenses of their home office. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.
Simplified Option Taxpayers may use a simplified option when figuring the deduction for business use of their home. The simplified option uses standard deduction of $5 per square foot of home used for business (maximum 300 square feet) to calculate deduction expense.
You may choose to use either the simplified method or the regular method for any taxable year.
If you use the simplified method for one year and use the regular method for any subsequent year, you must calculate the depreciation deduction for the subsequent year using the appropriate optional depreciation table. This is true regardless of whether you used an optional depreciation table for the first year the property was used in business. The optional depreciation tables for MACRS property are provided in the annual IRS Publication 946, How To Depreciate Property.
Below please see a comparison of the methods:
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