As the economy fluctuates and technology improves, more and more businesses are finding that working in smaller offices or from home offers a much lower overhead. In response to this changing environment, the IRS opted to update their office in home deduction in 2013 to a simplified option. Criteria for a home office didn’t change, only how to do the calculation and the recordkeeping requirements.
Before we get to the new simplified option, there are two basic requirements that your home must meet to qualify. If you have any questions about these, we recommend that you connect with your tax professional for an interpretation that is personalized for you.
- Regular and Exclusive Use – This means you have a separate room or a defined space that is ONLY used for your business. Examples that don’t qualify:
- Your kitchen table that is used briefly for work (and sometimes to feed yourself), even if you do that daily.
- Having boxes stored in the corner of your attic is not exclusive when your Christmas items are stored up there as well.
- Principal Place for Your Business – When you conduct business related activities, a substantial amount of those tasks need to be regularly performed in your home office. Examples of what won’t work:
- You write a blog post once a week while sitting on your couch watching TV (yes, sometimes I use myself as an example).
- You have a fully functional office with top of the line equipment and only work from there when you get snowed in – if you live on the East Coast, maybe; in Oregon, no (my home office is beautiful but not as beautiful as my commercial space).
- You pay for commercial space; spend a good 30+ hours there; and several times a week take a phone call, watch an educational video, or check emails on your portable laptop from the desk in the spare room. Good try, but no.
Did your space qualify? If so you have two options to choose from, the simplified or regular method. While you can only choose one method each calendar year, you do have the option to change the method in subsequent years. While flipping back and forth isn’t really “simplifying” your accounting, there may be tax benefits, and that is why we suggest you discuss these options with your tax professional.
- Standard deduction of $5 per square foot of home used for business (maximum 300 square feet)
- Allowable home-related itemized deductions claimed in full on Schedule A. (For example: Mortgage interest, real estate taxes)
- No home depreciation deduction or later recapture of depreciation for the years the simplified option is used
Comparison of methods
|Simplified Option||Regular Method|
|Deduction for home office use of a portion of a residence allowed only if that portion is exclusively used on a regular basis for business purposes||Same|
|Allowable square footage of home use for business (not to exceed 300 square feet)||Percentage of home used for business|
|Standard $5 per square foot used to determine home business deduction||Actual expenses determined and records maintained – Direct (repairs and improvements) and Indirect (utilities, insurance, general repairs that affect areas of your home that are used for business)|
|Home-related itemized deductions claimed in full on Schedule A||Home-related itemized deductions apportioned between Schedule A and business schedule (Sch. C or Sch. F)|
|No depreciation deduction and no recapture upon sale of home||Depreciation deduction for portion of home used for business; recapture on gain upon sale|
One of our clients emailed us last month commenting on how much she disliked creating a spreadsheet to capture her home office deduction items – which is one of the tools we recommend if you are going to do the regular method. A work around we suggest is to use a business account or credit card to pay those utilities which would then be tracked with your regular business recordkeeping. While the expenses may not be 100% deductible, you will have all of them already pulled together in a nice neat package for your tax processing at the end of the year.
**Please note, this solution works best for sole proprietors or single member LLCs. If you are a Corporation there may be some tax limitations to a home office that could affect your shareholder basis and should be discussed with a qualified tax professional.
ADI Team Resources
For more info here is a link to IRS Publication 587, Business Use of Your Home