Small-business owners who work from home may qualify for the home-office deduction. However, you must meet several requirements before you can claim the home office deduction.
Exclusive use test
The office portion of the home must be used exclusively and regularly for business purposes. Generally, a separate room or section of a room that is clearly divided by a partition qualifies as a home office.
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You cannot use the office portion for personal use.
Exception to the exclusive use test
The exclusive use test does not apply if you use a portion of your home to store samples or inventory. Any limited personal use of the area used to store inventory will not disqualify you from claiming the home office deduction.
Another exception to the exclusive use test applies if you use a portion of your home as a day care for children, the elderly or handicap individuals. For instance, if you provide day care services during the day and use the same portion of the home for personal use in the evening, you can still claim the home office deduction.
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 a separate, free-standing structure like a studio, garage or a barn, if you use it exclusively and regularly for your business, you may qualify for the home office deduction.
Calculating the home office deduction
The first step to calculate the home office deduction is to determine the square footage of the area used exclusively for your business and the total square footage of your home.
Once you have determined that, you can use one of two methods to calculate the home office deduction: the simplified method and the regular/actual expense method.
Simplified Method
The simplified method uses a standard rate of $5 per square foot for the area used for business purposes. The maximum square feet allowed for this deduction is 300 square feet, meaning that a maximum deduction is $1,500 for the year.
For example, if your home office is 200 square feet, the home office deduction would be $1,000 if you use the simplified method.
Regular/Actual Expense Method
The regular/actual expense method is based on a percentage of your home. For example, if the office portion of your home is 150 square feet and the entire home is 1,500 square feet, the home office deduction would be 10% [200/2,000 = 0.1 = 10%] of the expenses for the home.
The benefit of using the simplified method is the ease of calculation. It also requires little to no record keeping.
The benefit of using the regular method is the prorated allocation of all home related expenses, such as, utilities, real estate taxes, home mortgage interest, depreciation, etc.
Note: When using the regular/actual method, you can only use the expenses incurred after the start of the business.
