In 2010 (the most recent year for which figures are available) nearly 3.4 million taxpayers claimed deductions for the business use of a home.
In January 2013, the IRS issued new simplified rules for the deduction of the home office expense [Rev. Proc. 2013-13].
This revenue procedure provides an optional safe harbor method that individuals may use to determine the amount of deductible expenses attributable to business use of their home. This safe harbor method is an alternative to the more tedious existing method of the calculation, allocation and substantiation of actual expenses required by Section 280A of the Internal Revenue Code.
When is the home office deduction allowed?
The home office deduction allows you to deduct expenses that are allocable to a portion of your home that is used exclusively for business on a regular basis. Your home must generally be your principle place of business
a place you meet with patients, clients or customers in the normal course of business, or
as a separate structure used for business that is not attached to the home
How are is the home office deduction determined?
Generally, expenses are determined as a percentage of the square footage used for business purposes relative to the total square footage of the home. Your deduction cannot exceed the income you earn from your business.
The new simplified rules
Under the simplified reporting rules, the home office deduction is calculated by multiplying the business area of your home time the prescribed rate of $5 not to exceed 300 square feet. For example, if you live in a 2,000 square foot home that includes a 15 x 15 foot office space, you could deduct up to 225 square feet times the $5 per square foot rate, or $1,125. If your home office exceeds the maximum 300 square feet allowed, you are limited to a maximum deduction of $1,500.
There are certain restrictions where both the husband and wife use the same area for business, or you use the same area for multiple businesses you may operate, or you moved during the tax year. Similarly, you cannot deduction any direct expenses for repairs made specific to the office space. There is also no deduction allowed where you may receive any allowances or other reimbursements for expenses from your employer. Once elected, the election is irrevocable. However, you can use actual expenses in lieu of the amounts calculated under the safe harbor method in succeeding tax years.
Other restrictions may also apply so it is best to always seek the advice of a professional if you have any questions.