When determining the home office deduction expense, there are two avenues a taxpayer can pursue but must still have the proper documentation in the event of an audit.
Simplified Method
The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. In most cases, you will figure your deduction by multiplying $5, the prescribed rate, by the area of your home used for a qualified business use. The area you use to figure your deduction is limited to 300 square feet. Make the choice for a home by using the simplified method to figure the deduction for the qualified business use of that home on a timely filed, original federal income tax return. An election for a tax year, once made, is irrevocable. However, you can change it in future years.
Shared Use
If you share your home with someone else who also uses the home in a business that qualifies for this deduction, each of you makes your own election as long as it’s separate spaces and more than one qualified business use. If you conduct more than one business that qualifies for this deduction in your home, your election to use the simplified method applies to all your qualified business uses of that home.
More Than One Home
If you used more than one home in your business during the year (for example, you moved during the year), you can elect to use the simplified method for only one of the homes. You must figure the deduction for any other home using actual expenses.
Using Actual Expenses
Direct expenses only for the business part of your home - deductible in full.
Examples: Painting or repairs only in the area used for business
Indirect expenses for keeping up and running your entire home – deductible based on the percentage of your home used for business.
Examples: Insurance, utilities, and general repairs
- If the expense is indirect, use the business percentage of these expenses to figure how much to include in your total business-use-of-the-home deduction. If you are itemizing your deductions on Schedule A (Form 1040), these expenses include the following: Real estate taxes; Home mortgage interest; Casualty losses attributable to a federally declared disaster; Repairs: the cost of repairs that relate to your business, including labor (other than your own labor), is a deductible expense
Unrelated Expenses only for the parts of your home not used for business - not deductible. Examples: Lawn care or painting a room not used for business
Determining Your Deduction Percentage Example
- Your office is 240 square feet (12 feet × 20 feet)
- Your home is 1,200 square feet
- Your office is 20% (240 ÷ 1,200) of the total area of your home
- Your business percentage is 20%
Flexibility is Key if Your Needs Grow Year-To-Year
As long as you can document the progress as your business grows that you need to expand the business use of your home, then you're not locked into the Simplified Method of the Home Office Deduction. However, using the Actual Expenses Method you will need more actual documentation, i.e., copies of utility bills, alarm bills, repair bills as they are related to the home office area, etc. for audit purposes. If you need further information or need any assistance how best to make sure you're not short on lacking proper substantiation, contact a tax resolution associate with Bookkeeping-Results, LLC to make sure your information is properly documented.
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