Home Office Tax Deduction
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes.
For taxable years starting on, or after, January 1, 2013 (filed beginning in 2014), you now have a simplified option for computing the home office deduction (IRS Revenue Procedure 2013-13, January 15, 2013). The standard method has some calculation, allocation, and substantiation requirements that are complex and burdensome for small business owners.
This new simplified option can significantly reduce the burden of recordkeeping by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses.
Beginning in tax year 2013 (returns filed in 2014), taxpayers may use a simplified option when figuring the deduction for business use of their home.
Note: This simplified option does not change the criteria for who may claim a home office deduction. It merely simplifies the calculation and recordkeeping requirements of the allowable deduction.
Most of our clients prefer the simplified option.
Highlights of the simplified option:
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
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
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
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
Depreciation deduction for portion of home used for business
No recapture of depreciation upon sale of home
Recapture of depreciation on gain upon sale of home
Deduction cannot exceed gross income from business use of home less business expenses
Amount in excess of gross income limitation may not be carried over
Amount in excess of gross income limitation may be carried over
Loss carryover from use of regular method in prior year may not be claimed
Loss carryover from use of regular method in prior year may be claimed if gross income test is met in current year
Selecting a Method
You may choose to use either the simplified method or the regular method for any taxable year.
You choose a method by using that method on your timely filed, original federal income tax return for the taxable year.
Once you have chosen a method for a taxable year, you cannot later change to the other method for that same year.
If you use the simplified method for one year and use the regular method for any subsequent year, you must calculate the depreciation deduction for the subsequent year using the appropriate optional depreciation table. This is true regardless of whether you used an optional depreciation table for the first year the property was used in business.
Full details on the new option can be found in Revenue Procedure 2013-13.
Taxpayers using the regular method (required for tax years 2012 and prior), instead of the optional method, must determine the actual expenses of their home office. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. The regular method requires more work and calculating to see what your deductions actually result in from home office use. Also must be aware that taking the depreciation of part of your residence will result in possible capital gains tax due when selling your residence, where normally you do not have capital gains tax when selling your residence up to the exclusion amount.
Generally, when using the regular method, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.
Requirements to Claim the Home Office Deduction
Regardless of the method chosen, there are two basic requirements for your home to qualify as a deduction:
1. Regular and exclusive use.
2. Principal place of your business.
Regular and Exclusive Use.
You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.
Principal Place of Your Business.
You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.
For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business.
You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.
Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.
Additional tests for employee use. If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. You must meet the tests discussed above plus:
Your business use must be for the convenience of your employer.
You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.
If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.
For a full explanation of tax deductions for your home office refer to Publication 587, Business Use of Your Home. In this publication you will find:
Requirements for qualifying to deduct expenses (including special rules for storing inventory or product samples).
Types of expenses you can deduct.
How to figure the deduction (including depreciation of your home).
Special rules for daycare providers.
Tax implications of selling a home that was used partly for business.
Records you should keep.
Where to deduct your expenses (including Form 8829, Expenses for Business Use of Your Home, required if you are self-employed and claiming this deduction using the regular method).
The rules in the publication apply to individuals.