The Home Office Deduction can help business owners save some money during tax time. Individuals are eligible to claim this deduction if they use a portion of their home exclusively, and on a regular basis, for any of the following:
As the individual’s main place of business;
As a place of business where the individual meets patients, clients or customers in the normal course of business;
If it is a separate structure that is not attached to the individual’s home, then the individual must use this structure in connection with their business;
A place where the individual stores inventory or samples (this place must be the sole, fixed location of their business); or
Under certain circumstances, the structure where the individual provides day care services.
If an individual meets the eligibility criteria above, then he or she may deduct eligible expenses connected with the business use of their home, including:
Real estate taxes
Repairs and Maintenance
Note, certain expenses are limited to the net income of the business. These are known as allocable expenses, and include things such as utilities, insurance, and depreciation. While allocable expenses cannot create a business loss, these expenses can be carried forward to the next year. If the taxpayer carries them forward, the expenses are subject to the same limitation rules.
Calculating the Deduction
There are two separate methods individuals can use to calculate the amount of the deduction.
Regular method: This method requires splitting the above home expenses between personal and business use. Self-employed taxpayers must file a Schedule C with their tax return, and then compute the deduction on IRS Form 8829.
Simplified method (easiest method): The simplified method reduces the paperwork and recordkeeping for small businesses. The simplified method has a set rate that is capped at $1,500 per year, based on $5 a square foot for up to 300 square feet.
Note, special rules apply to the following business owners:
Daycare providers need to complete a special worksheet, which is found in IRS Publication 587.
Self-employed individuals can claim the deduction on Form 1040, Schedule C, Line 30.
Farmers can claim the deduction on Schedule F, Line 32.
About the Author
Attorney Jordan D. Howlette is the President of MyTaxRights, LLC and the managing-member of JD Howlette Law, LLC, a civil litigation firm that represents individuals and businesses involved in tax disputes with the IRS, the United States Department of Justice (DOJ), and various state departments of revenue. A former trial attorney with the DOJ’s Tax Division, Jordan leverages his extensive background in tax litigation to educate others about their federal tax rights and responsibilities. Each tax season, Jordan also volunteers as a tax coach with the Center for the Advancement of Tax Equity, where he teaches others how to self-prepare and file their taxes through the non-profit's free tax clinics.