Neil V. Birkhoff

Neil V. Birkhoff
Principal

On May 28, the Internal Revenue Service released Tax Tip 2019-66 discussing the rules and benefits of the home office deduction.

The IRS reminds small business owners that they may qualify for a home office deduction if they use a part of their home exclusively and on a regular basis for:

  • The taxpayer’s main place of business.
  • A place of business where the taxpayer meets patients, clients, or customers. The taxpayer must meet these people in the normal course of business.
  • A home office that is a separate structure not attached to the taxpayer’s home. The taxpayer must use this structure in connection with their business.
  • A place where the taxpayer stores inventory or samples. This place must be the sole, fixed location of their business.
  • The structure where the taxpayer provides day care services, under certain circumstances.

Deductible expenses for business use of a home include the following:

  • Real estate taxes
  • Mortgage interest
  • Rent
  • Casualty losses
  • Utilities
  • Insurance
  • Depreciation
  • Repairs and Maintenance

Certain expenses, referred to as “allocable expenses,” are limited to the net income of the business.

These allocable expenses include utilities, insurance, and depreciation. Although allocable expenses cannot create a business loss, they can be carried forward to the next year. If the taxpayer carries them forward, the expenses are subject to the same limitation rules.

The IRS Tax Tip notes two options for figuring and claiming the home office deduction.

  1. The “regular” method requires dividing the above expenses of operating the home between personal and business use. Self-employed taxpayers file Form 1040, Schedule C and compute the deduction on Form 8829.
  2. The “simplified” method reduces the paperwork and recordkeeping for small businesses. Under this method, the IRS allows a set rate of $5.00 per square foot for business use of the home, up to a maximum of 300 square feet.

Special rules for the home office deduction apply to certain business owners.

  • Daycare providers must complete a special worksheet, which is found in IRS Publication 587.
  • Self-employed individuals must use Form 1040, Schedule C, Line 30 to claim the deduction.
  • Farmers claim the home office deduction on Schedule F, Line 32.

If you have any questions about the home office tax deduction, please contact one of the attorneys of the Woods Rogers Tax Group.