Simplified Home Office Deduction Option Explained
An Easy Alternative to Form 8829
Owners of home-based businesses now have a second, simpler way to calculate the deduction for the home office space. The simplified deduction doesn't have anything to do with your ability to qualify for a home office deduction; it just changes the way the deduction is calculated.
There are two options for figuring your home business space deduction. Both include a calculation of the amount of home space used for your business.
- The regular calculation method includes making a detailed list of home expenses.
- The simplified calculation just multiplies the amount of space by a specific square foot amount, up to a maximum. Using this method doesn't require a complicated calculation.
The simplified deduction is optional. It is capped at $1,500 a year, based on $5 a square foot, for up to 300 square feet. The aim of this option, the IRS says, is to reduce paperwork and recordkeeping burdens on small businesses.
How to Qualify for the Home Business Space Deduction
To be able to deduct expenses for your home business space using either the simplified or regular calculation method, you'll need to do some things:
First, you must be able to prove that you use the space regularly and exclusively for business purposes. "Regular" just means on a schedule, whether it's daily, weekly, or monthly. "Exclusively" means ONLY. No personal use of that space is allowed if you want to get the business tax deduction.
This article about how to make your home office more audit-proof explains how the "regular and exclusive" test works.
Second, you must also be able to show that this space is your principal place of business (a specific IRS designation). This is especially important for employees who work at home or businesses that have a home office and another business space.
Then, you need to calculate the amount of space your office takes up. Find the amount of livable space for your entire home and calculate the percentage of space taken up by your business office. You can run this calculation as a percentage of your home's overall square footage or as a percentage of the number of rooms.
For example, if you have an office space of 150 square feet and your home is 1200 square feet, your office takes up 12.5% of your total home space.
Before you decide which method to use, you'll need to understand how each method for calculating the deduction works.
How the Regular Home Office Deduction Calculation Works
Home business owners were previously required to complete Form 8829 to calculate the home business space deduction.
Your home business space deduction includes two parts:
First, list all direct expenses, such as paint, wallpaper, and other expenses directly related to and used in the business space. These expenses may be deducted at 100%.
Then calculate home business space and use the percentage to calculate all indirect expenses. These are expenses for the entire house that are applied to the home business percentage, such as utilities, rent, property taxes. So, for example, if the home business space is 10% of the home's square footage, then 10% of the total of these indirect expenses could be deducted.
How the Simplified Calculation Method Works
The simplified calculation is done by multiplying the allowable square footage of the home business space using a prescribed rate. The allowable square footage must still meet the 'regular and exclusive rule" and be your principal place of business.
To take the simplified deduction, your space must not be more than 300 square feet. The current rate is $5, hence the current deduction limit is $1500. (The rate will be adjusted by the IRS from time to time.)
Include Your Home Space Deduction on Your Business Tax Return
Your simplified home office deduction is included in your small business income tax return, which is different for each business type. For a business reporting taxes report (Schedule C), you'll find a separate section for this deduction.
Normal vs. Simplified Calculation: Which to Take?
If you have a very small home business space, under 300 square feet, the simplified deduction might be best.
If your business space is large, or if you have many expenses related to your home business space for the year (but ONLY to that space), you might get a larger deduction with the normal method.
If you aren't sure, calculate the space percentage and then do a quick calculation of both options. The instructions for Schedule C include a simplified deduction worksheet that might help you in this calculation.
Important Points in Understanding the Simplified Calculation
- You can use the new simpler calculation or the current computation using Form 8829, whichever results in a larger deduction.
- You must still adhere to the requirements that the business space must be used "regularly and exclusively" for business purposes. If both of these requirements are not met, the office space cannot be deducted as a business expense.
- Other normal business expenses that are not related to the home business, such as advertising, supplies, and wages, are still fully deductible, in the same way as these expenses are deductible to all non-home-based businesses.
- The amount of the deduction cannot exceed the net income of the business; in other words, the deduction cannot be used to create a business loss for tax purposes.
- If you have more than one home-based business using the same space, you must use the simplified alternative for all businesses.
Home Expense Deductions Relating to Your Home Business
If you use the simplified method, you cannot deduct any actual expenses on your business tax return related to the qualified business use of that home for that taxable year. This would include mortgage interest and property taxes and also casualty losses.
Your use of the simplified method does not allow you to depreciate the portion of your home used for business purposes. But mortgage interest, real estate taxes, and casualty losses can still be claimed on the personal tax return on Schedule A (itemized deductions). These deductions do not need to be allocated between personal and business use, as is required under the regular method.
How Does the Simplified Method Work for My Business Type?
The deduction works the same way whether it's the standard or simplified option.
Sole proprietors and single-owner LLC's include this deduction when they file their business taxes on Schedule C with their personal tax returns.
Partners in partnerships may be able to take a home business deduction (simplified or standard) as an unreimbursed ordinary and necessary expense paid on behalf of the partnership.
S corporation owners may also be able to take the deduction, but it's tricky. Check with your tax professional.
Owners of corporations who work as employees may be able to take the deduction as employees if they are required to keep this home space for business purposes, as required by the employer.
Should I Take a Home Office Deduction?
Many home business owners don't take any deduction for the use of their home office, because (a) the paperwork is so complicated there is a risk of making a mistake, and (b) they believe that taking this deduction results in an increased risk of an audit. While the simplified option may not provide as high a deduction, it certainly simplifies the process and it might make sense to take this option if the deduction amount is close to the amount generated by Form 8829.
Disclaimer: Before you consider whether to take a home office space deduction or which deduction option to take, discuss your options with your tax professional. Each business tax situation is different, and it is not the purpose of this article or this site, to provide tax or legal advice.