Home Office Tax Deduction

Home Office Tax Deduction

A taxpayer may take a home office deduction relating to a residence that the taxpayer occupies where:

1. the taxpayer exclusively uses a portion of the residence on a regular basis as a principal place of business for any trade or business;
2. the taxpayer regularly uses the residence as a place of business that is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of the taxpayer’s trade or business; or
3. in the case of a separate structure that is not attached to the residence, the taxpayer uses the separate structure in connection with the taxpayer’s trade or business.

In the case of an employee, a home office deduction is allowed only if, in addition to satisfying the exclusive and regular use test, the home office is for the convenience of the employer.

In the above situations, an allocable portion of expenses attributable to the residence can be deducted.

Example:

Lets assume that the home where the home office is located in is a total of 2000 square feet and the home office portion is 200 square feet. You would take 10%(200/2000) of all indirect home expenses such as interest, real estate taxes, etc. as a home office deduction, and the other 90% of those expenses would go to Schedule A as itemized deductions.

The IRS has recently allowed taxpayers to use a second option called the Simplified Home Office Deduction. The qualifications shown above are all the same, but the Simplified Method simply multiplies the home office space square footage by $5 up to a maximum of 300 sq. ft. For our example home that would be 200 sq. ft. x $5 = $1,000. An advantage of this method is that you get to have a home office deduction, and you are still able to report 100% of your home mortgage interest and real estate taxes on your Schedule A as itemized deductions.

It is best to calculate the possible deduction using both methods to see which one is most beneficial.

If you have any questions about this or any other accounting related topic, please do not hesitate to contact us here at Shein & Wente CPA in Melbourne, Florida!