Home Office Expense: Meaning, Calculation, Examples

Key takeaways
* Home office expenses are costs tied to operating a business or performing employment-related activities from your primary residence.
* Deductions reduce taxable income but are subject to rules about exclusive and regular use and other limits.
* The IRS allows two calculation methods: the regular (actual-expense) method and the simplified method. Check current IRS guidance for updates since tax-law changes in 2017.

What qualifies as a home office expense
Home office expenses include portions of housing costs (utilities, mortgage interest, property taxes, insurance, repairs) and business-specific costs (office supplies, phone lines, computer equipment) related to a business conducted at home. Only expenses incurred in the normal course of business and attributable to the home workspace are potentially deductible.

Qualifying conditions
A space in your home qualifies only if it meets the IRS tests of exclusive and regular use in one of these ways:
* It is used exclusively and regularly as your principal place of business.
* It is used exclusively and regularly to meet or deal with clients, patients, or customers in the normal course of business.
* It is a separate, unattached structure used in connection with the business.
* It is used regularly for certain storage purposes, as a rental for the business, or as a daycare facility (subject to special rules).

Note: The area does not need a permanent partition, but it cannot be used for both personal and business purposes and still qualify.

How to calculate home office deductions
Two methods are permitted by the IRS: the regular method (actual expenses) and the simplified method.

Regular (actual-expense) method
1. Classify expenses:
* Direct expenses — costs only for the business area (e.g., painting or repairs in the room used for business).
* Indirect expenses — costs for the entire home that also benefit the office (e.g., utilities, insurance, general repairs).
2. Determine the business percentage of your home:
* Divide the business area (square footage) by total home square footage, or
* If room sizes are similar, divide the number of rooms used for business by total rooms in the home.
3. Apply that percentage to indirect expenses and deduct direct expenses in full.

Keep accurate records and use the IRS worksheet for guidance. If your total deductible expenses exceed gross income from the business use of your home, the deduction may be limited.

Simplified method
The simplified method was introduced to reduce recordkeeping:
1. Determine the allowable area used for business (square footage).
2. Multiply the allowable area by $5 per square foot (subject to IRS limits and special rules for daycare).
3. Compute net business income related to home use by subtracting business expenses unrelated to home use from gross income attributable to the business use of the home.
4. The deductible amount is the smaller of the amount from step 2 and the net business income from step 3.

The simplified method requires less documentation but may yield a smaller deduction in some situations. Certain restrictions apply (for example, shared-space situations may limit use of this method).

Limitations and important cautions
* Exclusive and regular use is strictly interpreted—using a laptop on a couch while watching TV does not qualify.
* If deductible expenses exceed your gross income from the business use of the home, the deduction may be limited.
* Tax-law changes can affect eligibility and amounts. For example, limits on property tax deductions may interact with home office deductions.
* Other restrictions and technical rules are detailed in IRS Publication 587.

Examples
Freelance writer:
* A writer with a dedicated 200-square-foot home office, a work-only cell phone, and business-related subscriptions can generally deduct a portion of home costs proportional to the office area, plus full deduction for direct business items (printer, supplies, training).

Non-qualifying example:
* A person who works daily from a coffee shop without a dedicated home workspace cannot claim mortgage or utility costs as home office deductions (other business-related expenses may still apply).

Recordkeeping and next steps
* Keep receipts, records of square footage calculations, and documentation separating direct and indirect expenses.
* Use IRS worksheets and forms for the chosen method.
* Consult a tax professional to confirm eligibility and maximize lawful deductions.

For official guidance, consult IRS Publication 587 (Business Use of Your Home) and current IRS resources.