For tax years beginning on and after Jan. 1, 2013, you may be able to use a simplified method of claiming deductions for your home office. The new procedure won’t replace the current actual cost method, but it will offer a “safe-harbor” alternative.
To claim a home-office deduction under the current method, you have to compile your actual home expenses such as depreciation, property taxes, and mortgage interest (or rent expenses, if you’re a tenant). You then compute the ratio of the square footage of your home office to that of your entire home and apply the ratio to your home expenses to determine the deductible amount.
Under the optional new method, you would simply multiply the square footage of your home office by $5.00 to arrive at your deduction. The maximum allowable area for this purpose is 300 square feet, which caps the deduction at $1,500.
The following considerations apply to either method:
The area claimed must be used regularly and exclusively for business. This means it must be either your principal place of business or a place where you meet or deal with customers in the ordinary course of business. If you’re an employee, the use of your home must be for your employer’s convenience.
For each year, the deduction is limited to the net business income remaining after all other deductions have been subtracted.
Business expenses that aren’t connected to the use of your home (such as supplies, advertising, and wages) remain fully deductible.
You’ll be permitted to switch back and forth between the simplified and actual methods from year to year but an election to use either procedure will be irrevocable for the particular year selected. Therefore, you’ll need to review your home office situation annually to determine which option is better for you.