Who Can Use Either Method
Your method choice doesn’t change who qualifies for the deduction. Under both IRS methods, you must use the space exclusively and regularly for business. Renters can deduct part of their rent under the actual expense method. The simplified method is open to anyone who meets the exclusive and regular use tests.
If you’re an employee who works from home, you can’t claim a home office deduction. Miscellaneous itemized deductions for employee business expenses were eliminated for tax years beginning after 2017. The deduction is mainly for self-employed people, who report business income on Schedule C, or on Schedule F if they farm.
Simplified vs. Actual Expense Method Compared
The IRS rules for each method differ most in recordkeeping and in how they treat your other home deductions.
| Simplified method | Actual expense method | |
|---|---|---|
| How it’s figured | $5 × office square feet | Business-use percentage × actual home expenses |
| Maximum deduction | $1,500 (300 sq ft) | No set dollar cap |
| Records needed | Square footage | Receipts and bills for every expense |
| Mortgage interest and real estate taxes | Claimed in full on Schedule A | Split between Schedule A and your business schedule |
| Depreciation | Not allowed | Allowed if you own |
| Excess deduction carryover | Not allowed | Allowed |
| Form for Schedule C filers | Simplified Method Worksheet | Form 8829 |
Schedule C filers use Form 8829 for actual expenses or the Simplified Method Worksheet for the simplified method. Schedule A is where you list itemized deductions if you skip the standard deduction.
Under either method, your deduction can’t exceed the gross income from the business use of your home, minus your business expenses.
How Each Method Works
Simplified Method
You multiply your office’s square footage by $5. The IRS simplified option rules cap the space at 300 square feet. You don’t track home bills, and you claim no depreciation, so you face no depreciation recapture when you sell.
Actual Expense Method
You figure the percentage of your home used for business, then apply it to your actual costs. Per IRS Publication 587, those costs include insurance, rent, repairs, a security system, and utilities and services. Homeowners can also deduct depreciation.
Under Publication 587, depreciation is a yearly deduction for the wear on the business part of a home you own. Recapture means that if you sell the home at a gain, you pay tax on the depreciation you deducted. If a deduction runs over the income limit, you can carry the excess to a future year.
Worked Example: 200-Square-Foot Home Office
This is a hypothetical example. Say you rent a 2,000-square-foot home and use 200 square feet only for your business. Your rent, utilities and insurance total $24,000 a year.
| Step | Simplified method | Actual expense method |
|---|---|---|
| Business share | 200 sq ft | 200 ÷ 2,000 = 10% |
| Calculation | 200 × $5 | 10% × $24,000 |
| Deduction | $1,000 | $2,400 |
The actual expense method gives you $1,400 more in deductions here. Now suppose your home business income, after other business expenses, is only $1,800. Your actual expense deduction would be limited to $1,800 that year, and you could carry the remaining $600 forward.
Which Home Office Method to Choose
Run the numbers both ways, then weigh the result against the paperwork.
- Choose the simplified method if your actual costs are low or you want to skip tracking home bills.
- Choose the actual expense method if your housing costs are high or your office is larger than 300 square feet.
- Consider recapture if you own because depreciation lowers your taxes now but can raise them when you sell at a gain.
- Consider Schedule A if you itemize because the simplified method keeps your full mortgage interest and real estate taxes there.
You choose a method by using it on your original return filed on time. After that, you can’t switch methods for that year. If you move from the simplified method to actual expenses in a later year, you’ll need optional depreciation tables to figure depreciation.
