What You Need to Know About the Home Office Deduction
- Eric Leib
Working from home is becoming more and more popular. And while W-2 employees are no longer eligible to deduct their home expenses, those who own or co-own a business can take advantage of the deduction. Here’s what you need to know about the home office deduction and how you might be able to use it for your situation.
Taxpayers can take this deduction if they use a portion of their home exclusively, and on a regular basis, for any of the following:
Taxpayers can also take the deduction if the space is a separate structure that is not attached to the taxpayer’s home and that is used in connection with their business.
Deductible expenses for business use of an area of the home include:
Certain expenses are limited to the net income of the business. These are known as “allocable expenses.” They include things such as utilities, insurance, and depreciation. While allocable expenses cannot create a business loss, they can be carried forward to the next year. If the taxpayer carries them forward, the expenses are subject to the same limitation rules.
There are two options for figuring and claiming the home office deduction:
Here is a comparison of the two options:
|Simplified Option||Regular Method|
|Standard $5 per square foot||Actual expenses determined and records maintained|
|Allowable only up to 300 square feet||Actual percentage of home used for business|
|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 home-related itemized deductions claimed in full on Schedule A (e.g., mortgage interest)||Home-related itemized deductions apportioned between Schedule A and business schedule (Schedule C or F)|
|No home depreciation deduction||Depreciation deduction for portion of home used for business|
|No recapture of depreciation upon sale of home||Recapture of depreciation on gain when home is sold|
|Deduction cannot exceed the difference between gross income from business use of home and 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 method in prior year may be claimed if gross income test is met in current year|
When considering which method to use, keep the following in mind:
Which form to use differs depending on the type of business:
The home office deduction is just one of the tax benefits available to small business owners. Call your CRI tax advisor to discuss how to maximize your tax benefits and improve your bottom line.
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