Your home office business deductions are based on the percentage of your home used for the business or a simplified square footage calculation.
Percentage of your home method:
The most exact way to figure this proportion is to measure the square footage devoted to your home office and find what percentage it is of the total area of your home. If the office measures 150 square feet, for example, and the total area of the house is 1,200 square feet, your business percentage would be 12.5% (150 ÷ 1,200).
An easier way is acceptable if the rooms in your home are all about the same size. In that case, you can figure the business percentage by dividing the number of rooms used in your business by the total number of rooms in the house.
Special rules apply if you qualify for home office deductions under the day care exception to the exclusive-use test. Your business-use percentage must be discounted because the space is available for personal use part of the time. To do that, you compare the number of hours the day care business is operated, including preparation and cleanup time, to the total number of hours in the year (8,760).
Assume you use 40% of your house for a day care business that operates 12 hours a day, five days a week for 50 weeks of the year. That’s 3,000 hours out of the total of 8,760 hours in the year. That’s 34% of the available hours, so your business write-off percentage is 13.6% (40% of 34%).
Simplified square footage method:
Beginning with 2013 tax returns, the IRS began a simplified option for claiming the deduction. This new method uses a prescribed rate multiplied the allowable square footage used in the home. For 2014 the prescribed rate is $5 per square foot with a maximum of 300 square feet. The space must still be dedicated to the business activity as described above.
With the simplified method, if the office measures 150 square feet, for example, then the deduction would be $750 (150 x $5).
NOTE: With either method the qualification for the home office deduction is made each year. So you might qualify one year and not the next, or vice versa.