Business Income: Home Office Deduction
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes.
The new tax law didn’t change the rules for the home office deduction for IRS Form 1040, Schedule C (self-employed) taxpayers. The simplified method to determine the deduction is also the same.
If you use part of your home exclusively and regularly for conducting business, you may be able to deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation for that area. You need to figure out the part of your home, utilities, repairs, and depreciation that you use only for your business activities. There are two methods to help you determine the part of your home used only for your business activities.
Regular Method: You compute the business use of home deduction by dividing expenses of operating the home between personal and business use. You may deduct direct business expenses in full, and may allocate the indirect total expenses of the home to the percentage of the home floor space used for business.
A qualified daycare provider who doesn’t use his or her home exclusively for business purposes, however, must figure the percentage based on the amount of time the applicable portion of the home is used for business. Self-employed taxpayers filing IRS Form 1040, Schedule C, Profit or Loss From Business (Sole Proprietorship), first compute this deduction on IRS Form 8829, Expenses for Business Use of Your Home.
Simplified Option: You may find the simplified option less burdensome than the regular method. If you meet the requirements, you can use a prescribed rate of $5 per square foot of the portion of the home used for business (up to a maximum of 300 square feet) to compute the business use of home deduction. Under this safe harbor method, depreciation is treated as zero and you claim the deduction directly on IRS Form 1040, Schedule C. Instead of using IRS Form 8829, you indicate your election to use the safe harbor option by making two entries directly on the IRS Form 1040, Schedule C for the square footage of the home and the square footage of the office.
This simplified option doesn’t change the criteria for who may claim a home office deduction. It simply makes the calculation and recordkeeping requirements of the allowable deduction easier.
The new tax law didn’t change the rules for the home office deduction for IRS Schedule C (self-employed) taxpayers.
The simplified method to determine the deduction is also the same.
How will this affect me?
Jackson is self-employed and sells woodwork on an online craft platform. He conducts his woodworking, including the packaging, shipping, and related books and records in his basement. The section of his basement used for his business is separate from the section used for personal use.
Jackson’s home office meets the exclusive use requirement and he must figure out the percentage of his home used for the business to allocate expenses. For his 2018 tax return, he can choose to calculate the home office deduction by using the regular method or the simplified option based on square footage. He chooses the simplified option because his home office deduction calculation and recordkeeping requirements are easier. Because the area Jackson uses for business is 150 square feet, he can deduct $750 ($5 times 150 square feet) for the deduction on Schedule C.
The same as above, except that the basement area Jackson uses to woodwork is also shared with his wife’s personal craft area. He can’t claim the home office deduction at all, because the home office area is not exclusively (only) used for his business.