Work from home? New Simplified Home Office Deduction method is offered by the IRS

As meeting professionals some of you probably have a home office like I do and the IRS now offers a simplified method to give you a tax deduction for it.  You might have heard something about the home office deduction in the past but thought it might lead to increasing your chances of an audit.  So, you didn’t look into it even though it could save you money.  It has been a popular myth that taking the home office deduction would lead to an audit, but let me give you some news about how the IRS views this deduction now.

Beginning last year the IRS announced a new, simpler option to figure the business use of your home.  The rules are still the same for qualifying for the deduction regardless of the method chosen.  So, if you meet these rules, then read on:

The Rules:

1. 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.

2. 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 also 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.

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, and
  • 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.

The Good News: Here is the simplified method the IRS now offers:

The IRS offers a rate of $5 per square foot of the part of your home used for business.  The maximum footage allowed is 300 square feet.  This means that the most you can deduct is $1,500 per year.  Not bad and so, so simple.  Almost no calculator needed to figure this out.

You can choose either this simplified method or the old-fashioned actual expense method for any tax year.  This means you can choose each year which method to use on your tax return.  You cannot change methods in the same year though.

This simplified option does not change the rules for who may claim a home office deduction. It merely simplifies the calculation and recordkeeping requirements. The new option can save you a lot of time and will require less paperwork and recordkeeping. 

You can use the simplified method when you file your 2016 tax return.  You won’t need to calculate your deduction based on actual expenses – just multiply the square footage of your home office by the rate (up to the maximum allowed) and take your deduction.

If you use the simplified method and you own your own home, you cannot depreciate your home office but you can still deduct other qualified home expenses, such as mortgage interest and real estate taxes, without allocating these expenses between personal and business use on your Schedule A, Itemized Deductions.  (If you use the actual expense method, you’ll need to allocate these expenses).

You can still fully deduct business expenses that are not related to the home if you use the simplified method.  These may include costs such as advertising, supplies and wages paid to your employees.

If you use more than one home with a qualified home office in the same year, you can use the simplified method for only one in that year. However, you may use the simplified method for one and actual expenses for any others in that year.

Also, did you know that storing materials in your garage – all those old business cards, floor layouts and vendor materials from a long, long time ago– qualifies for the home office deduction?

Here’s a graphic chart to help you with the Home Office Deduction

Comparison of methods

Simplified Option

Regular Method

Deduction for home office use of a portion of a residence allowed only if that portion is exclusivelyused on aregular basisfor 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

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

Same

Amount in excess of gross income limitation maynotbe 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

Talk with your accountant to see if you qualify and if the new simplified method for deducting a home office is right for you. Or, check it out yourself by going to irs.gov and getting publication 587, Business Use of Your Home.

 

Author, Speaker and Certified Financial Planner,  Steve Hoffman, known as The Tax Translator is a tax professional who worked for the IRS for 15 years (but please don’t hold that against him!!).  He can be contacted by email at Steve@TheTaxTranslator.com for more information.