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By Peter Jason Riley, CPA

The home office has been a contentious subject in my profession for a number of years.  With recent legislation, the studio/home office has clearly returned to its rightful place as an allowable deduction for many folks with home based businesses.  If you use a room (or rooms) in your home exclusively as your office, you will most likely qualify for the home office deduction.  To qualify as a deductible home office the space must generally be:

  1. The principal place of business
  2. The place where the taxpayer meets with clients, customers or patients

The use of the room can be as an office, studio, dark room, storage area for equipment, artwork and supplies, record keeping for the business, marketing, etc.

The Traditional Deduction

The traditional home office deduction is a fairly straightforward deduction to calculate on Federal form 8829.  It simply utilizes a formula based on the square footage of the business portion (the studio/home office) of your home vs. the total square footage of the house or apartment and then applies that percentage to all associated costs.  The costs can include rent, mortgage interest, real estate taxes, condo fees, utilities, insurance, repairs, etc.  If you own your own home you can even depreciate that portion of your house for an additional write-off. 

For example:

  Business use (square footage) 250
  Total square footage of home 1250
  Business use % (250/1250) 20%
Mortgage Interest $7,500  
Real Estate Tax $2,500  
Utilities $1,820  
Water & Sewer $820  
Insurance $400  
Repairs $225  
Total home expenses $13,265  
  Potential home office deduction:

Other rules that come into play here include the “exclusive use” requirement.  This rule states that the home office must be used only for the business – no “mixed use” allowed.  In other words the office/studio cannot be a part of a larger room such as the living room unless the business part is partitioned off in some way. 

The New “Simplified Method” of deducting the Home Office

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.

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.
 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
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 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 methoin 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.

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