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IRS Home Office Deduction: Simplified vs. Regular Method

If you use part of your home regularly and exclusively for business, you may qualify for the home office deduction. The IRS offers two methods for calculating this deduction, and choosing the right one can save you hundreds or even thousands of dollars per year on your taxes.

Who Qualifies for the Home Office Deduction?

To claim the home office deduction, you must use a specific area of your home regularly and exclusively for business. This applies to self-employed individuals, freelancers, and independent contractors who file Schedule C. Since 2018, W-2 employees can no longer claim the home office deduction under the Tax Cuts and Jobs Act, though some states still allow it.

The space does not need to be a separate room, but it must be a clearly defined area used only for business. A desk in the corner of your bedroom qualifies as long as it is not used for personal activities.

Simplified Method

The IRS simplified method allows you to deduct $5 per square foot of your home office, up to a maximum of 300 square feet. This caps the deduction at $1,500 per year. The main advantages of the simplified method are:

• No need to track individual home expenses
• No depreciation calculations or recapture concerns
• Much simpler record-keeping requirements
• You can still deduct mortgage interest and property taxes on Schedule A

Regular (Actual Expense) Method

The regular method requires you to calculate the actual expenses associated with your home and allocate them based on the percentage of your home used for business. Deductible expenses include:

• Mortgage interest or rent
• Utilities (electricity, gas, water, internet)
• Homeowners insurance
• Repairs and maintenance (allocated by business use %)
• Depreciation of the home (excluding land value) over 27.5 years for residential property

The regular method often produces a larger deduction, especially for homeowners with significant mortgage interest, high utility costs, or expensive homes. However, it requires more detailed record-keeping and the depreciation component may trigger depreciation recapture tax when you sell the home.

Which Method Should You Choose?

Use this calculator to compare both methods side by side. As a general rule, if your office is small (under 300 sqft) and your home expenses are modest, the simplified method may be sufficient. If you have a large office, high home expenses, or an expensive home, the regular method typically yields a bigger deduction. You can switch between methods from year to year, so run the numbers annually to maximize your tax savings.

Important Limitations

The home office deduction cannot exceed your business income for the year (it cannot create a loss under the simplified method). With the regular method, excess expenses can sometimes be carried forward. Additionally, if you claim depreciation under the regular method, you may owe depreciation recapture tax (up to 25%) when you sell your home. Always consult a tax professional for advice specific to your situation.