To qualify for a Home Office Deduction, a home office must be used for business exclusively and at all times, and any use for a nonbusiness purpose disqualifies the space.
Calculating the amount of the deduction can be done one of two ways:
- the actual-expense method, under which the home office deduction amount is based on the actual expense related to the use of the home office incurred by the taxpayer, or
- the new safe-harbor method, under which the deduction amount is determined by a formula based on the square footage used as a home office.
Under the actual-expense method, any excess of otherwise deductible expense over the gross income limitation can be carried forward to the next tax year, subject to the same limitation. If the safe-harbor method is used, the amount of otherwise deductible expense in excess of the limitation cannot be carried forward to future tax years.
Whichever method is used to calculate the deduction, the amount of the deduction is subject to a gross income limitation, which is calculated differently. Furthermore, the carryforward rules for the deduction are different under each method.
