There are a lot of IRS rules regarding deductions of home office expenses, but taking the time to understand and navigate them successfully can pay off for the telecommuter or home business owner. And now (new in tax year 2013) that the IRS allows a simplified home office deduction, in which you take a standard deduction and don't deduct individual expenses, it is still important to know what is deductible so you can figure which method will be the most beneficial for you.
When you look at your home office it may appear full of home office deductions--equipment, furniture, shelving, etc.--all of which cost you a pretty penny. And so if you qualify for a home office deduction, you are eager to deduct it all.
But hold on! When figuring which home office expenses are deductible, the IRS separates out those less permanent features from the space itself. Furniture and equipment are deducted on a Schedule C. To deduct the use of part of your home as a business expense, use IRS Form 8829.
But before you break out the forms, consider first whether home office deductions are worth it. If you feel the answer is yes, read on.
Direct and Indirect Home Office Expenses
There are two types of deductible expenses relating to the use of part of your home as a home office: direct and indirect expenses. Direct expenses relate to the actual work space, so this includes repairs and paint inside your home office. Indirect expenses relate to the house that the office is inside, and are only partially deductible. Utilities and mortgage interest are examples of indirect expenses. (See examples of direct and indirect expenses.)
There are also unrelated home expenses that are not deductible at all for your home office, i.e lawn care or painting a room beside your office.
Figuring Percent of Business UseTo figure what portion of an indirect expense can be deducted, multiply the percentage of your home that is used for business by the amount of the expense. To calculate what percentage of your house is used for business, compare the size of your office to the size of your house using this formula.
Office Square Feet ÷ Total SF of home = Percentage of Business Use
All indirect expenses must be multiplied by the percent of business use. Note that if you began using your office during the tax year, all expenses must be prorated for the time you used the home office.
I am not a tax attorney, CPA or tax preparation specialist. The information here is meant as a general guide. For specific questions about your own taxes, please refer to IRS publications or consult a tax specialist.