The home office deduction is one of the most overlooked deductions by small business owners and those that are self-employed. If the expenses associated with the business use of your home qualify for the deduction, it can prove to be beneficial. Various criteria must be met in order for a taxpayer to take the Home Office Deduction.
In order to deduct expenses for the business use of a home those expenses must relate to the portion of your dwelling that is used exclusively and regularly as a principal place of business. A dwelling unit can include a house, an apartment, a condo, mobile home, a boat, or even structures that are detached from the personal residence. These structures can include a detached garage, a studio, barn, or even a greenhouse. The home office deduction is calculated using Form 8829 Expenses for Business Use of Your Home and then up until 12/31/17 would either be deducted on Schedule C line 30 or Schedule A line 21 as a miscellaneous itemized deduction. The schedule C deduction would apply to those that are self-employed and the Schedule A deduction applied to those that were employees that used their home as an office for the convenience of their employer. The Tax Cuts and Jobs Act (TCJA) removed all miscellaneous itemized deductions from Schedule A. With that said, employees will no longer benefit from the home office deduction.
The deduction is limited to the gross income derived from the qualified business use of the home, less deductions allowable. The deduction can be calculated one of two ways, using the simplified method or the regular method. Below is a chart provided by IRS.gov that compares the both methods.
| Simplified Option | Regular Method |
| Deduction for home office use of a portion of a residence allowed only if that portion is exclusively used on a regular basis for business purposes | Same |
| Allowable square footage for home use for business (not to exceed 300 square feet) | Percentage of home used for business |
| Standard $5 per square foot used to determine home business deduction | Actual expenses determined and records maintained |
| Home-related itemized deductions claimed in full on Schedule A | Home-related itemized deductions apportioned between Schedule A and business schedule (Sch. C or Sch. F) |
| No depreciation deduction | Depreciation deduction for portion of home used for business |
| No recapture of depreciation upon sale of home | Recapture of depreciation on gain upon sale of home |
| Deduction cannt exceed gross income from business use of home less business expenses | Same |
| Amount in excess of gross income limitation may not be carried over | Amount in excess of gross income limitation may be carried over |
| Loss carry over from use of regular method in prior year may not be claimed | Loss carry over from use of regular method in prior year may be claimed if gross income test is met in current year |
The simplified method is limited to $1,500 and can relieve the burden of the taxpayer to maintain appropriate records. The regular method requires the taxpayer to determine actual expenses and maintain the appropriate support and records for the deduction.
Real estate professionals are among those that often miss out on the home office deduction. If you happen to be a real estate agent or broker that is self-employed with a home office and aren’t taking advantage of the expenses related to the business use of your home reach out to a member of the HLB Gross Collins Real Estate team today for more information on calculating your home office deduction and how it could impact your taxable income.
- Abigail Hampton, Senior Tax Manager