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  • Michael Henninger

The Home Office Deduction....

This is a fantastic deduction that, for whatever reason, many people don’t seem to either know about or feel comfortable taking. Let’s take a look at it…in order to take this deduction, there are two requirements that must be met:

1. Principal place of your business: Of the two requirements, this is the most serious in the eyes of the IRS. If you have an office in town or are using a coworking space, you could lose this deduction. We say “could lose” because there are multiple court cases that allowed a person who meets clients and customers at a “main office” but use their home office to complete administrative tasks like answering emails, returning calls, handling invoicing and other accounting functions and still qualify for the home office deduction.

2. Regular and Exclusive Use: You must regularly use part of your home exclusively for business purposes. This one is pretty straightforward.

NOTE: If you have more than one business, you can only use this deduction for one of them.

Deductions for a home office are generally based on the percentage of your home used for business purposes. This means that if you use a room or dedicated space for business, you’ll need to calculate the percentage of that space in comparison to the total size of your home. This calculation is needed to use the Regular Method. Under this method, taxpayers can use the actual expenses of their home to determine their deduction. These expenses include insurance, mortgage interest, real estate taxes, utilities, repairs and depreciation. Two things to realize; using the regular method means that you’ll be pulling deductions away from Schedule A (itemized deductions) AND there could be depreciation recapture in the future. The tradeoff is that regular method can produce a larger deduction than the Simplified Method which we will discuss next.

Under the Simplified Method, a qualified taxpayer multiplies an IRS prescribed rate by the allowable square footage of the office. This can substantially reduce time spent on record keeping. There are a few reasons why a taxpayer may opt for the simplified method. First, it allows a TP to fully utilize deductions on Schedule A (itemized deductions. Also, since there’s no depreciation to calculate and claim, there’s none to recapture later. The max deduction is $5 per square foot up to a maximum of 300 square feet for a total deduction of $1,500.

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