Home Office Deduction...

The home office deduction is an often-missed deduction that allows taxpayers who use part of their home “exclusively and regularly” (see below) for business purposes to deduct certain expenses associated with the business use of their home. This deduction is available to both homeowners and renters, and it applies to all types of homes. There are two methods for calculating the home office deduction: the Simplified Option and the Regular Method.

Simplified Option

• Standard Deduction: The code allows $5 per square foot of the area used for business, up to a maximum of 300 square feet, resulting in a maximum deduction of $1,500.
• Home-Related Itemized Deductions: Full home-related itemized deductions (e.g., mortgage interest, real estate taxes) are allowed on Schedule A without needing to allocate them between personal and business use.
• Depreciation: No depreciation deduction for the portion of the home used in business and, consequently, no recapture of depreciation upon the sale of the home.

Regular Method

• Direct and Indirect Expenses: This method involves calculating the actual expenses of home office use. Direct expenses (expenses solely for the business part of your home) are fully deductible, while indirect expenses (expenses for keeping up and running the entire home) are deductible based on the percentage of the home used for business.
• Depreciation: The portion of the home used for business can be depreciated, adding to the deduction.
• Calculation: The deduction is based on the percentage of the home devoted to business use. You can calculate this by dividing the area used for business by the total area of the home.

Eligibility Requirements:

• Exclusive Use: The space must be used exclusively for conducting business on a regular basis. This means that using a room both as an office and a personal space does not qualify. It must be used only for business purposes.
• Regular Use: The area must be used on a regular basis for business. Occasional or incidental business use does not qualify.
• Principal Place of Business: Your home office must be your principal place of business, or a place where you meet clients, patients, or customers in the normal course of your business.

Deduction Limit:

• The deduction for business use of the home is limited to the gross income from the business use of your home minus the sum of the business expenses. This simply means that the expenses related to your home can not create a loss to the business.

How to Claim:

• Simplified Option: Simply multiply the square footage of the office by $5 and report it on Schedule C.
• Regular Method: Complete Form 8829, Expenses for Business Use of Your Home, and report the calculated deduction on Schedule C.
• Keep adequate records

One of the lesser known secrets of utilizing this deduction is that it unlocks the ability to write off Travel….more on this in a future article…