In the last post, we discussed what is allowable to be considered for the home office deduction. You can read that post at www.abandp.com/the-home-office-deduction-what-qualifies/. Today we’ll discuss how to determine your deduction amount.
Calculating Your Home Office Deduction
Once you determine that you qualify for the deduction, you can use one of two methods to calculate the amount you can deduct-the simplified or traditional method. Regardless of the method used, deductions cannot be more than the profit earned that year. Your deduction must be based on the percentage of your home used for business
The Simplified Method
This is an optional method designed by the IRS. It allows you to deduct the product of $5 and the area of the home used for a qualified business use. The downside to this method is that you are only allowed to deduct up to 300 square feet. Another downside to using the simplified method is that you will not be able to deduct business expenses related to your home, including depreciation of your home. Any home expenses such as mortgage interest and real estate taxes are treated as personal expenses. You can, however, include depreciation of other assets such as equipment and furniture. By electing this method, you may not deduct the disallowed amount carried over from previous years. Instead, you may opt to elect the actual method for the following tax year.
The Traditional Method
The traditional method includes actual expenses used in your home – either direct or indirect. Direct expenses are expenses specifically for your home office. Examples are painting your home office and paying an individual to clean it. This is entirely deductible. On the other hand, an indirect expense is one that benefits entire home, not just the office. It includes the following:
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Rent
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Mortgage, interest, and property taxes
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Depreciation
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Utilities
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Insurance
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Home maintenance costs
Only the percentage of the indirect expense pertaining to the home office expense is deductible. For example, if you use 25% of your home for business, 25% of your rent, utilities, and other indirect costs are deductible.
If you have questions regarding which scenario is best for you, contact your CPA to discuss your situation.
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