How much can you deduct for your home office?

I previously explained how to determine whether you qualify for the home office deduction.  Now I will explain how to compute your home office deduction.

First, figure the business percentage.  This is the percentage of your home that you use for your business.  If all the rooms in your home are approximately the same size, then just divide the number of rooms used for your business by the total number of rooms.  Otherwise, divide the square footage used for your business by the total square footage of your home.

Second, figure your expenses.

  • Direct expenses apply only to the business part of your home (such as painting or repairs) and are fully deductible.
  • Indirect expenses are expenses for keeping up and running your entire home (insurance, utilities, etc.).  You can deduct the business percentage of indirect expenses.
  • Unrelated expenses apply to parts of your home not used for the business (such as mowing the lawn).  These are not deductible.
MySpace
MySpace by Risager, on Flickr

If you own your own home, you can also depreciate.  This deduction provides an allowance for “wear and tear” on your home.  It is (basically) computed by dividing the cost of the home office by 39.

Taxation trivia: In certain circumstances, if you depreciate your home office, and then later sell your home, the amount of depreciation previously recorded becomes taxable as a gain.

There is a limit to your home office deduction, calculated on IRS Form 8829 (Instructions here).

Before you take a home office deduction, speak to a professional accountant or learn the rules here.

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

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