Eligibility comes first
For most self-employed taxpayers, part of the home generally must be used exclusively and regularly as a principal place of business or as a place to meet clients or customers in the ordinary course of business. A separate structure may also qualify when used exclusively and regularly in connection with the business.
Limited exceptions apply to certain inventory storage and daycare uses. Employees face different restrictions. A room that doubles as ordinary personal space usually does not meet the exclusive-use test.
Simplified method
The IRS simplified method generally multiplies the allowable area by $5 per square foot, limited to 300 square feet. That makes the maximum simplified amount $1,500 before applicable income limitations.
You choose the method for each eligible tax year on a timely filed original return. Using the simplified method means you do not also deduct actual home-office expenses or depreciation for that same qualified use in that year.
Actual-expense method
The actual method allocates direct and indirect home costs under the applicable rules. It can involve mortgage interest or rent, utilities, insurance, repairs, real estate taxes, and depreciation, depending on the facts. The result may be larger, but the calculation, supporting records, income limits, carryovers, and later home-sale or depreciation consequences deserve review.
Evidence to keep
- Measurements and a simple diagram or photos showing the business area.
- Calendar or work records showing regular business use.
- Evidence that the home is the principal place for administrative or management work when relying on that rule.
- Invoices and payment records for expenses used in an actual-method calculation.
- A written comparison of the simplified and actual methods for the year.