IRS; Must-Know Tips about the Home Office Deduction

If you use your home for business, you may deduct expenses for the business use portion of your home. If you qualify, you can claim the deduction whether you rent or own your place. You may use either the (a) Regular method or

(b) Simplified method to determine such deduction.

Here are six tips (modified by author to add points) from the IRS that you must know about the home office deduction:

1. Regular and Exclusive Use. Generally, you must use a portion of your home” regularly” and “exclusively” for running your business. The part of your home used for business must also be:

a- Your principal place of business, or,

b- A place where you meet clients or customers in the course of business, or

c- A separate structure not attached to your home. Examples could include a garage or a studio.

2. Regular Method. This method includes certain expenses that you incurred and paid for your home. For example, if you rent your home, part of the rent you paid may qualify. If you own your home, part of your home mortgage interest, taxes, utilities, etc. may qualify.

The amount you can deduct usually depends on the percentage of your home used in the course of your business.

3. Simplified Option. If you use this option, multiply the allowable square footage of your office by a rate of $5. The maximum footage allowed is 300 square feet. This option will save you time because it simplifies how you determine the deduction and allows you to deduct a maximum of $1,500 annually. It will also make it easier for you to keep records and does not change the rules for claiming a home office deduction.

4. Deduction Limit. If your gross income from the business use of your home is less than your home office expenses, the deduction for some expenses may be limited. In other words, you offset your expense up to your expenses and cannot generate a net operating loss.  

5. Self-Employed. If you are self-employed and choose the regular method, use the IRS form 8829, Expenses for Business Use of Your Home, to calculate the deductible expenses. You can claim your deduction using either method on Schedule C, Profit or Loss From Business. See the Schedule C instructions for how to report your deduction.

6. Employees. You must meet additional rules to claim the deduction if you are an employee. For example, your business use must also be for the convenience of your employer. If you qualify, you claim the deduction on Schedule A, Itemized Deductions, subject to 2% limitation.

For more on this topic, see Publication 587, Business Use of Your Home. You can view, download and print IRS tax forms and publications on anytime.

It is important to know that every taxpayer has a set of fundamental rights called Taxpayer Bill of Rights they should be aware of when dealing with the IRS.

Although, majority of the IRS employees are super nice, gentle and respectful to the taxpayers or their legal representation, there have been situations where I had to remind the IRS agents or managers of these rights.