Answer by Wray Rives:
First to take a home office deduction you need to have an area of your home that is used regularly and exclusively for business. It does not have to be a separate room, but does have to be used only for business purposes, so if you work at your dining room table, you cannot also eat dinner at the dining room table.
If you are an employee, then you must use the home office for the convenience of your employer and you may not rent any portion of your home to your employer and use the rented portion for performing services for the employer.
Sole proprietors deduct home office expenses from Schedule C profits. Employees take home office deduction as part of un-reimbursed employee business expenses on Schedule A. Partners deduct home office expenses from Schedule E partnership earnings.
There are two methods of calculating the home office deduction the Regular Method and the Simplified Method.
- All normal expenses to operate the home qualify, including utilities, repairs, mortgage interest, property taxes and cleaning. Normal itemized deductions such as property taxes and mortgage interest are reported on Schedule A net of the amount taken as part of the home office deduction.
- The deduction is based on the ratio of the square footage of space used for the home office to the total square footage of the home. There is no limit on the number of square feet used.
- If you own the home, you can also take a depreciation deduction as part of the home office deduction.
- If you later sell a home where you have taken a home office deduction, then you will potentially owe capital gains tax on the amount of depreciation that was or could have been taken as part of the home office deduction. The "could have taken" wording is important because you cannot avoid the capital gain, by not taking the depreciation. If you take any of the home office deduction, then you have to calculate any taxable capital gain when you sell the home.
Beginning with tax year 2013, you can use a simplified method to calculate the home office deduction.
- You deduct $5 per square foot of home office space (up to 300 square feet)
- You still can deduct the full amount with no reduction of eligible itemized deductions such as property tax and mortgage interest on Schedule A.
- If you use the simplified method, you also do NOT have to recapture any depreciation deduction as capital gain if you subsequently sell your home for a gain, unless you used the simplified method one year and subsequently switched to the regular method.