In a nutshell, home office expenses may be deductible if part of the home is used regularly and exclusively in the normal course of business of the taxpayer.
Exclusive use means just that. A taxpayer does not meet the requirements of the exclusive use test if the office is used both for business and for personal purposes. Of course, there are exceptions. One exception is for taxpayers who use part of their homes as day care facilities.
Generally, deductions for a home office are based on the percentage of the taxpayer’s home devoted to business use. The taxpayer must calculate the percentage of the home devoted to the business, then allocate the expenses of operating their home between personal and business use. Among the type of expenses which may be taken into account are the costs of insurance, utilities, repairs and depreciation.
New Simplified Option
The new simplified option is intended to remove some of the complexity from calculating the home office deduction. It is an alternative to the calculation and allocation of actual expenses otherwise required for the home office deduction. Taxpayers using the simplified option must continue to satisfy all of the requirements for the home office deduction (such as exclusive use and the other criteria discussed above).
Beginning with 2013 tax filings, a taxpayer using the simplified option will calculate the amount of allowable deductible expenses for business use of a home for the tax year. This is accomplished by multiplying the square footage used for the home office (not to exceed 300 feet) by the prescribed rate (currently $5) for a maximum deduction of $1,500. In addition, a taxpayer using the simplified option generally may take full itemized deductions for mortgage interest and property taxes, without any proration to account for a home office. Taxpayers may elect to use the simplified option in one year, and actual expenses in a subsequent year.
The new simplified option is optional. Some taxpayers may find it valuable because of its intended ease of use, but it is not a one-size-fits-all substitute to the regular rules. The simplified option will be available with 2013 tax-year returns. Our office can assist you in evaluating the new simplified option. Please contact our office for more information about the home office deduction.
Pearce, Gray and Co., PLC, is located at 3514 N. Power Road, Suite 135. Call (480) 835-1124. B. David Fuller, CPA, is a partner at Pearce, Gray and Co., PLC, and has been with the firm more than 15 years. He focuses on small businesses and real estate ventures.