A home office will qualify as the principal place of business if you use it exclusively and regularly to conduct administrative or management activities of your trade or business, and if there is no other fixed location of the business where you can conduct these activities. Home office deductions cannot be more than your earned income. If they are higher, you must carry over the nondeductible expenses to the following year. Form 8829, Expenses for Business Use of Your Home, is used to deduct home office expenses for a self-employed person or on Schedule A, Itemized Deductions, if an employee.
To use the traditional method to calculate to the Home Office deduction you must keep track of the total square footage of your house and your office space. You can deduct the business percentage of your mortgage interest and real estate taxes or rent, the business percentage of your electricity and gas (if used to heat or cool the house), homeowner’s insurance, home owner’s association dues, and any casualty or theft loss deduction. You can also deduct the business percentage of any repairs or maintenance done on the whole home. In addition, you can claim the total costs of any repairs or maintenance done only to the office space. If you own the home, you will also be eligible for depreciation on the home. Report your Home Office deduction on Form 8829, Expenses for Business Use of Your Home, if self-employed or on Schedule A, Itemized Deductions, if an employee. Any amount of deduction greater than the total income for the year may be carried forward and applied each future year the traditional method is used.
The simplified method of calculating the Home Office deduction is a shorter, quicker method of determining the deduction requiring less intense recordkeeping. Taxpayers can claim a deduction of $5 a square foot of qualifying home office space. The deduction is limited to $1,500 or 300 square feet. If you choose this method, you can claim no depreciation or any carryover of prior year unallowed deduction under the traditional method. If self-employed, report the simplified Home Office deduction on Schedule C, Self-Employment Income, Page 2.