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How does the simplified home office deduction work?

Updated By ProfitDrawer

Short answer

With the IRS simplified method, you multiply the square feet of the part of your home used regularly and exclusively for business by $5, up to 300 square feet, so the largest deduction is $1,500 a year. You do not track actual home expenses or take depreciation for that space. ProfitDrawer bookkeeping spreadsheets track your other business expenses, while the home office amount is figured separately on your return.

Rules for the simplified method:

  • Use test: the space must be used regularly and exclusively for business, the same test as the regular method.
  • Rate and cap: $5 per square foot, up to 300 square feet. For example, a 150 square foot office gives 150 x $5 = $750.
  • Income limit: the deduction cannot be more than your gross income from the business use of your home minus your business expenses.
  • No carryover: any amount over that limit is lost for the year, and a loss carried over from an earlier year under the regular method cannot be used.
  • No depreciation: there is no home depreciation deduction, and no later recapture, for years you use the simplified method.
  • Other home costs: if you itemize, mortgage interest and real estate taxes are claimed in full on Schedule A.
  • Choosing a method: you can choose the simplified or regular method each year, but once you file using one method for a year you cannot switch for that year.

IRS Publication 587 has the full rules. General information, not tax advice.

Source: IRS: Simplified option for home office deduction · Updated

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General information, not tax, legal or financial advice. Check the rules for your state and your situation.