Home Office Deduction: Save Hundreds or Thousands of Dollars in Taxes Every Year

Deduct both direct expenses for the home office and indirect expenses, such as mortgage interest and insurance. If your business requires travel and you work out of your home office, then your mileage counts as deductible business miles. There is no nondeductible commuting distance!
The home-office area must be used exclusively and regularly for business. Occasional work does not count. You must perform most of your work there or earn most of your income because of activities in the home office. You can also use the home office to manage the business, even if you spend most of your time outdoors, such as a sales representative or plumber. One exception to the exclusive use requirement is in the provision of daycare services, where an area can be used exclusively for daycare during business hours but may be used for other things during nonbusiness hours. However, the deduction is further reduced by the number daycare hours of the business divided by the number of hours in a year.
Direct expenses apply only to the home office area, so they are fully deductible.
Indirect expenses are limited to the cost of the expense multiplied by the business-use percentage, which is the ratio of the area of the office over the area of the whole home.
Renters can deduct rent while homeowners can deduct depreciation, mortgage interest, real estate taxes, and other expenses incurred by ownership. However, these deductions are limited to the business-use percentage of the expense.
Homeowners can claim depreciation for their home-office property, but the depreciation must use the commercial recovery period of 39 years rather than the residential recovery period of 27.5 years.
The depreciation deduction equals the tax basis of the home, not including the land, multiplied by the business use percentage multiplied by the depreciation percentage, which, for commercial property, is 2.564% for the year.
The tax basis of both the property and the land is the lower of the fair market value or the adjusted basis when the home office is set up. This tax basis is used for all subsequent years.
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You may choose actual expenses or the simplified method for any given year but once chosen, then the election is irrevocable for that year. However, disallowed deductions can only be carried over from years using actual expenses to future years using actual expenses. The simplified option does not allow any carryover of disallowed deductions, nor may any previously disallowed deductions be carried over to any year using the simplified option.
The home office deduction is figured on Form 8829, Expenses for Business Use of Your Home is then transferred to Schedule C, Profit or Loss from Business. Schedule C is also the form used to choose the simplified method for claiming the home office deduction, in which case, Form 8829 does not have to be filed.
If you claimed depreciation for your home office, then that depreciation must be recaptured when the property is sold. The tax rate on the recaptured depreciation is the lower of your marginal tax rate or 25%.