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How Do I Qualify For The Home Office Deduction?

By August 18, 2015Blog

Self-Employed? Time to Utilize The Home Office Deduction To Its Fullest

If you or someone you know is self-employed then you have heard some form of the question “Can I write off part of my house for business?”  This is a common question that we hear and there is quite a bit of confusion around this deduction.  How much of a deduction should you take, and how do you know what that amount should be?

According to the IRS, there are two basic requirements to have your home or an area of your home qualify for the home office deduction.  First, the area of your home must be regularly and exclusively used for business.  Second, you must show that you use your home as a principal place of business.  However, if you have business at another location but also use your home substantially and regularly, then you can still take the deduction for your home office space.

First Method (Regular)

There are two different ways to compute your home office deduction.  In the regular method, the taxpayer must first determine the percentage of their home that is used for business.  Home related itemized deductions must be apportioned between itemized deductions and business deductions.  A depreciation deduction is taken for the home office, which upon sale of the home must be recaptured and taxed.

Second Method (Simplified)

In 2013 the IRS came out with a simplified method for determining the amount of the home office deduction.  The requirements to be able to take the deduction are the same for both the regular method and the simplified option.  Rather than determining a percentage of the space used for business, there is an allowable limit based on square footage (not to exceed 300 square feet).  You are allowed a deduction for $5 per square foot of business space.  All other home related deductions are claimed as part of your itemized deduction.  With this method no depreciation deduction is taken and no depreciation recapture is dealt with on the sale of the home.

Which Method Should I Use?

Based on this information, each year you will want to review which option gives you a better tax deduction.  Based on our experience, the majority of the time the simplified method will yield better results.  Another benefit of the simplified method is that you don’t have to deal with depreciation recapture on the sale of your home.

Either way we recommend talking with a professional about whichever method will give you the greatest deduction and save you more money.  So go ahead and give us a call and we will let you know right now which home office deduction method you should utilize for your situation.

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