BUSINESS MATTERS

JIM DENTON
L edger Lines

How the Home Office Deduction Works

O
ne of the tax benefits of working
at home is the ability to deduct
part of your home for business.
The Home Office Deduction is available
for owners and renters alike and applies
to all types of homes. This deduction is a
way of capturing otherwise non-deductible
expenses such as utilities, insurance, repairs
and depreciation on your tax return and
reducing your tax bill.
In 2013, the IRS introduced what
is called the Simplified Option for
computing and deducting the business
use of your home. The deduction allows
taxpayers a prescribed rate per square
foot of their office versus calculating
their actual expenses. For 2013, the new
optional deduction is capped at $1,500
per year based on $5 a square foot for up
to 300 square feet. Know that if you are
an employee, the deduction is entered on
Schedule A Itemized Deductions and
is limited to 2 percent of your income.
If self-employed, the deduction goes on
Schedule C and directly reduces your
income from your business.
Using the Regular Method likely
will produce a larger deduction because
there is no cap on the amount that can be
deducted. But, the Home Office Deduction
cannot create a loss on your Schedule C or
exceed your related employment income.
There are two requirements in order to
claim the deduction:
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October 2014 | The Business Times

1. Regular and Exclusive Use means

a deduction is allowed only when it is used
solely for business. The cleanest solution is
that an extra room used for business is used
only for business. There are two exceptions.
One is where you are running a day care
from your home. The other is when you
store inventory or product samples in your
home. In those cases, you are not required
to meet the exclusivity test.
2. Principal Place of Business you
must show that you use your home as
a primary business location. The office
doesnt even have to be the only one, as
long as you dont conduct substantial
administrative or management activities
someplace else.
Once those particulars are determined,
you can calculate the deduction by
multiplying your indirect expenses (utilities,
insurance, repairs and depreciation) by
your business usage percentage. Your
business usage percentage is the square
footage of your business usage divided by
the total square footage of the home. Any
direct expenses such as painting the room
of your home office are fully deductible.
You are also allowed to deduct
depreciation on your home. Depreciation
is the gradual amortization of the cost of
a long-lived asset over a period of years.
The IRS allows you to deduct the cost of
real estate used in business spread across
39 years.

Employees must meet the tests above

plus their business use must be for the
convenience of their employer and their
home cannot be rented to their employer.
If the use of the home office is merely
for the convenience of the employee, you
cannot deduct home office expenses.
Whether you use the Simplified Method
or the Regular Method, you still may
claim a deduction for mortgage interest,
real estate taxes and casualty losses on
your home. The difference is that on the
Simplified Method, you would report the
entire amount of each on Schedule A. On
the Regular Method you are required to
allocate your indirect expenses between
personal and business use.
Taking a Home Office Deduction
might flag you for an IRS audit but dont
let that stop you from taking it if you
qualify for a deduction.
JIM DENTON is a CPA and a managing
partner with Arledge & Associates P.C. in
Edmond. He may be reached via email at
jim@jmacpas.com.