More Americans are working from home than ever before. Some are employees, telecommuting for a few days a month. Some are small business owners working from home for convenience and cost-savings.
If you have a business, a home office must be a space in your home that is regularly and exclusively used for business. It can’t be a part of your family room or the dining room table (unless your business regularly and exclusively uses the dining room as its office.) Measure the square footage of your business use. Measure your total square footage. Divide the business use number by the total to determine your business use percentage. Now apply that to your indirect home expenses such as rent, mortgage interest, property tax, HOA dues and more. Direct expenses such as the cost to convert a closet to bookshelves is fully deductible.
There is now a new method starting with the 2013 tax year. The old method still applies. The choice is up to you.
Requires regular and exclusive use, just like old method
Flat rate of $5/square foot for the year, up to 300 square foot
Do not need to allocate mortgage interest and property tax between Schedule A and home office
Can not roll over unused home office deduction to future years
Is the new method better? It depends on your own circumstances. Talk to a CPA about your own unique situation.