Are you eligible to use the Simplified Method for Your Home Office?
As tax rates continue to increase, taxpayers are looking for opportunities to reduce their overall tax burden. That said, taxpayers do not want a significant record keeping burden. To help taxpayers who work from their home, the IRS has developed a Simplified Method for taking advantage of the Home Office Deduction as described below.
Before we discuss the Simplified Method it is important to understand three things:
What are Home Office Expenses?
If you use part of your home exclusively for business, you may be eligible to deduct expenses for the business use of that portion of your home. To do this, a taxpayer must compute the portion of all expenses attributable to that portion of the home including items such as utilities, taxes, interest, etc.
Who can use such a Deduction?
The Home Office Deduction is available for a homeowner or renter, and applies to all types of homes.
What is the Criteria for Claiming the Home Office Deduction?
- You may claim a deduction for the business use for a portion of your residence only if that portion is exclusively used on a regular basis for business purposes
- If you are an employee, you may deduct expenses attributable to a business use of your residence only if that use is for the convenience of your employer
Now that we understand these items, what is the Simplified Method for Home Office Deduction?
This method does not change the criteria for who may claim a home office deduction. It merely simplifies the calculation and recordkeeping requirements of the allowable deduction, and is effective for taxable years beginning on or after January 1, 2013.
Steps for Calculating the Simplified Method for Home Office Deduction
- Determine the allowable square footage (not to exceed 300 square feet)
Use the prescribed rate of $5.00 per square foot to calculate the amount of deductible expenses for a qualified business use of the home for the taxable year by multiplying the allowable square footage by the prescribed rate.
Year-to-Year Determination
- You may elect from taxable year to taxable year whether to use the simplified method
- An election for any taxable year, once made, is irrevocable
- The election is made by simply using the appropriate method on the tax return for the year. This change is not a change in method of accounting and does not require the consent of the Commissioner
Business expenses unrelated to the business use of a home
A taxpayer using the simplified method for a taxable year may also deduct any trade or business expenses unrelated to the business use of the home. That is, expenses for advertising, wages, supplies, etc., are not part of the simplified computation.
Otherwise allowable deductions related to the home
If you elect the simplified method for a taxable year, then your home-related itemized deductions, such as mortgage interests and real estate taxes, can be claimed in full on Schedule A of your personal income tax return.
Limitations on applying Simplified Method for Home Office Deduction
- No depreciation deduction, including any additional first-year depreciation or §179 expense, for the portion of the home used in a qualified business is allowed for that taxable year
- The deduction cannot exceed the gross income derived from the business use of the home less other business expenses. Any amount in excess of this limitation is disallowed and may not be carried over and claimed as a deduction in any other taxable year
- Loss carryover generated by use of the regular method in a prior taxable year may not be claimed if you elect simplified method for current taxable year
- If you have more than one business using the same home for a taxable year and you elect the simplified method, then you must use the simplified method for each business use of the home. The aggregate is limited to a maximum of 300 square feet, i.e., in total, not per business.
If you use more than one home for a taxable year, then you may use the simplified method for only one home for that taxable year.
