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.
Changes for Employees Working from Home
Under the 2017 Tax Cuts and Jobs Act, if you are an employee working from home, you can no longer claim a deduction for home office expenses that are not reimbursed by your employer. Miscellaneous deductions have been removed from Schedule A.
The home office deduction is for self-employed business owners.
No matter which option you select, to qualify as a deduction, your home office must meet two requirements:
- It must be your principal place of business, and
- It must be used both regularly and exclusively for business purposes.
Home Business Space Deductions - Two Options
You have 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 Option Explained
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 is to reduce paperwork and recordkeeping burdens on small businesses.
In addition to the home office space deduction, you may also claim mortgage interest and real estate taxes on Schedule A. But you can't deduct depreciation for years when the simplified option is used.
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.
How to Qualify for a 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:
Regular and exclusive use. 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.
Principal place of business. You must also be able to show that this space is your principal place of business. if you have no other fixed location where you conduct business, your home office is automatically your principal place of business. If you conduct business in more than one location, consider:
- The amount of time spent at each place where you conduct business and
- The relative importance of activities at each place where you conduct business.
Calculate office 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, you are under the maximum of 300 square feet for the simplified deduction, so you have the option of taking either the simplified or the regular deduction.
- If you want to use the simplified method, your deduction is $5 x 150 sq. ft. = $750.
- If you want to use the regular method, you'll need to do more calculations and use Form 8829 (explained below).
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.
In the example above, your home office space is 12.5% of your total square feet. All calculations are based on that percentage. This article explains how to do this calculation on Form 8829.
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, including partnerships and LLCs. 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.
- 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.
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.