Home Office Deduction: The Simplified Option, in Plain Words

The IRS says taxpayers may use a simplified option when figuring the deduction for business use of their home. The IRS says this simplified option simplifies the calculation and recordkeeping requirements of the home office deduction.

The IRS also says the simplified option does not change the criteria for who may claim the deduction.

The basic number

• The rate is $5 per square foot of home used for business.
• The most square feet that count is 300 square feet.
• 300 square feet times $5 is $1,500. That is the largest amount this rate and limit can give.

The IRS says the allowable square footage is the smaller of two numbers: the portion of a home used in a qualified business use of the home, or 300 square feet. The amount is that square footage multiplied by $5.

A rule that applies to both methods

There are two methods: the simplified option and the regular method. Under the IRS comparison, a deduction for home office use of a portion of a residence is allowed only if that portion is exclusively used on a regular basis for business purposes. The IRS lists that rule as the same for both methods.

The IRS gives this general meaning for a qualified business use of a portion of the home:

• Exclusive and regular use as the main place in which a person conducts their business, or meets with customers, clients, or patients.
• Regular use as a storage area for products the person sells in their business, or samples, if the home is the only place the person conducts their business.
• Regular use in providing daycare services for children, the elderly, or disabled persons.

Employees

The IRS says taxpayers can no longer claim a deduction for use of a home office as an employee. The IRS says miscellaneous itemized deductions for employee business expenses were eliminated for tax years beginning after 2017, even if the simplified method is used.

How the two methods differ

How the amount is figured. Under the simplified option, the standard $5 per square foot is used to determine the home business deduction, and the allowable square footage is not to exceed 300 square feet. Under the regular method, actual expenses are determined and records are maintained, and the figure uses the percentage of the home used for business.

Home-related itemized deductions. Under the simplified option, allowable home-related itemized deductions are claimed in full on Schedule A. The IRS gives mortgage interest and real estate taxes as examples. Under the regular method, home-related itemized deductions are apportioned between Schedule A and the business schedule, Schedule C or Schedule F.

Depreciation. Under the simplified option, there is no depreciation deduction, and there is no recapture of depreciation upon sale of the home. Under the regular method, there is a depreciation deduction for the portion of the home used for business, and there is recapture of depreciation on gain upon sale of the home.

The IRS says that for taxable years in which the simplified method is used, the depreciation deduction allowable for the portion of the home used in a qualified business use is deemed to be zero.

The income limit

Under both methods, the deduction cannot exceed gross income from the business use of the home, less business expenses.

The IRS states this limit for the simplified method this way: the amount computed using the simplified method cannot exceed the gross income derived from the qualified business use of the home for the taxable year, reduced by the business deductions that are unrelated to the qualified business use of the home.

What happens to the part over the limit. Under the simplified option, an amount in excess of the gross income limitation may not be carried over. Under the regular method, an amount in excess of the gross income limitation may be carried over.

Under the simplified option, a loss carryover from use of the regular method in a prior year may not be claimed. Under the regular method, a loss carryover from use of the regular method in a prior year may be claimed if the gross income test is met in the current year.

Actual expenses in a simplified year

The IRS says a person cannot use the simplified method for a taxable year and also deduct actual expenses related to the qualified business use of the home. The amount allowed as a deduction when using the simplified method is in lieu of a deduction for actual expenses.

The IRS also says a person cannot use the simplified method and deduct any depreciation for the portion of the home used in a qualified business use for the same taxable year. The IRS says depreciation for depreciable business assets other than that portion of the home — for example, furniture and equipment — can still be deducted.

Choosing a method for a year

• A taxpayer may choose to use either the simplified method or the regular method for any taxable year.
• A method is chosen by using that method on the timely filed, original federal income tax return for the taxable year.
• Once a method has been chosen for a taxable year, the taxpayer cannot later change to the other method for that same year.
• If the simplified method is used for one year and the regular method is used for any subsequent year, the depreciation deduction for the subsequent year must be calculated using the appropriate optional depreciation table.
• The simplified method may be elected for taxable years beginning on or after January 1, 2013.

More than one use, more than one home, more than one person

• The same method must be used for all qualified business uses of the same home for a particular taxable year.
• For all qualified business uses of the same home, the allowable square footage is limited to 300 square feet in total. The IRS says the square footage must be allocated among the qualified business uses using any reasonable method, and no more square footage may be allocated to a qualified business use than is actually used in that qualified business use.
• The simplified method cannot be used for qualified business uses of more than one home for a taxable year. The IRS says the simplified method may be used for the qualified business use of one home and the standard method for the business use of any other homes for that taxable year.
• Two or more persons sharing a home can each use the simplified method, but not for use of the same portion of the home. The IRS gives this example: spouses may each use the simplified method for a qualified business use of the same home for up to 300 square feet of different portions of the home.
• If a person has a qualified business use of a home and a rental use of the same home, the simplified method cannot be used for the rental use.

Part of a year, or a change during the year

The IRS says that when the qualified business use is for less than the entire taxable year, or the portion of the home used changes during the year, the average of the monthly allowable square footage for the taxable year must be determined.

For that average, no more than 300 square feet may be taken into account for any one month, and a month counts only if there were 15 or more days of a qualified business use of the home in that month.

General information only — not legal or tax advice.