Deductions for Business Use of Home

Deductions for Business Use of Home

 

By Lisa Timbrook, Senior Manager   

In today’s fast paced ever changing world, many self-employed individuals have found effective ways to reduce overhead costs and office rent by setting up an office space in their home. Not self- employed? Even some W-2 employees may be able to benefit. Be sure to ask your employer if they have a telecommuting policy in place.

Do I have a qualified home office?

To qualify for the deduction, a portion of your home must be used regularly and exclusively as follows:

  • A principal place of business, including administrative use
  • A place to meet with clients, patients, or customers during the normal course of business
  • If the home office is a separate structure not attached to the personal residence, used in connection with the business

What types of expenses qualify?

Qualified home office expenses include the following:

  • Mortgage interests
  • Real estate taxes
  • House Insurance/Security System
  • Home repairs/ Maintenance
  • Rent
    • Casualty losses
    • Utilities
    • Depreciation
    • Other expenses such as garbage removal, snow plowing, etc.

Qualified expenses are broken down into two categories, direct and indirect.

  • Direct Expenses – directly benefit the home office space
    • Repairs or painting made to the specific room used for business
  • Indirect Expenses – benefit both personal and business portions of the home
    • Mortgage interest, utilities, real estate taxes, rent, homeowners insurance, and general repairs

If you are self-employed, direct expenses are fully deductible against your business income whereas only the business portion of indirect expenses are deductible.

How do I calculate my deduction?

There are two options for calculating the deductible amount.

  • Regular method
    • Deduct direct business expenses in full and allocate the indirect total expenses between personal and business by calculating the business-use percentage of your home. Only the business portion of indirect expenses is deductible.
    • Business-use percentage of the home is determined by any reasonable method
      • Rooms used for business vs. total rooms (if all comparable size)
      • Percentage of floor space used for business versus total floor space (based on square footage)
  • Simplified method
    • The deduction equals $5.00 multiplied by the home’s square footage used for business up to a maximum of 300 square feet. The individual does not need to compile all related expenses if they choose to use this method.
    • The simplified option does not change the criteria for claiming a home office deduction; it merely simplifies the calculation and recordkeeping requirements.

Is my deduction limited?

The business portion mortgage interest, property taxes, and casualty losses is deductible in full against business income. If this results in a net loss on a Schedule C, any disallowed deductions carry forward to the following year. The deduction for the business portion of other home office costs, such as insurance, utilities, and security is limited to the business’ income minus deductions allowed including deductions not related to the home.

If you are a W-2 employee and your home office space meets the qualifications, you can deduct expenses on Schedule A as itemized deductions subject to the 2%-of-AGI limit. Business use of an employee’s home must be for the convenience of the employer.

If you have questions about the home office deduction, please consult with a CST advisor.