Business Owners May Benefit from Home Office Deduction
Business owners may qualify for a home office deduction that can help them save money on their taxes. Taxpayers may take this deduction if they use a portion of their home exclusively, on a regular basis, and for any of the following:
- As the taxpayer’s main place of business.
- As a place of business where the taxpayer meets patients, clients, or customers. The taxpayer must meet these people in the normal course of business.
- If it is a separate structure that is not attached to the taxpayer’s home. The taxpayer must use the structure in connection with their business.
- A place where the taxpayer stores samples or inventory. This place must be the sole, fixed location of their business.
- Under certain circumstances, the structure where the taxpayer provides day care services.
Deductible expenses for business use of a home include but are not limited to:
- Mortgage interest
- Real estate taxes
- Repairs and maintenance
- Casualty losses
Certain expenses are limited to the net income of the business. These are known as allocable expenses. They include items such as utilities, insurance, depreciation, rent, and repairs and maintenance. While allocable expenses cannot create a business loss, they can be carried forward to the next year. If the taxpayer carries them forward, the expenses are subject to the same limitation rules.
There are two options for figuring and claiming the home office deduction:
The regular method requires dividing the above expenses of operating the home between personal and business use based on square footage. Self-employed taxpayers file Form 1040, Schedule C, and compute this deduction on Form 8829.
The simplified method reduces the recordkeeping and paperwork for business owners. The simplified method has a rate of $5 a square foot for the business use of the home. The maximum deduction allowed is based on up to 300 square feet.
There are special rules for certain business owners:
- Self-employed taxpayers use Form 1040, Schedule C, Line 30 to claim the deduction.
- Daycare providers complete a special worksheet, which is found in Publication 587.
- Farmers claim the home office deduction on Schedule F, Line 32.
- The Tax Cuts and Jobs Act modified the home office deduction for employees. After December 31, 2017, the home office deduction as a miscellaneous itemized deduction subject to 2% of AGI is not deductible.
- The home office deduction is not allowed for shareholders/employees of a S corporation.
If you would like to discuss the home office deduction and how it may apply to your business and taxes, please contact our office.
Blog contributed by PHB’s Senior Tax Advisor, Craig Foster