How is the home office deduction calculated?

To deduct the business use of your home, you can choose between two methods. Either way, the deduction can't exceed the limit based on your gross income.

The regular method

You allocate your home's operating expenses between personal and business use. Find your business percentage —business area ÷ total area, or business rooms ÷ total rooms if rooms are about the same size. Expenses fall into three buckets:

• Direct expenses (benefit only the business area, e.g. painting or repairs to that space): fully deductible.
• Indirect expenses (run the whole home —insurance, utilities, general repairs): deductible by your business percentage.
• Unrelated expenses (parts not used for business —lawn care, painting a personal room): not deductible.

Under this method you can also claim depreciation on the portion of the home used for business.

The simplified method (safe harbor)

Designed to cut the complexity of calculating and substantiating actual expenses:

• Deduction = $5 per square foot × the home area used for business.
• Area is capped at 300 square feet (a max of $1,500). If you run more than one qualifying business at home, the 300 sq ft cap applies to all of them combined.
• You can't deduct actual home expenses, and depreciation is treated as zero (no depreciation or Section 179 for the home portion).

Not sure which method wins for you? At DISSAU we run both and apply the one that gives you the larger deduction within the rules.