Office In The Home

Easiest way

is to deduct a home office using the optional “Simplified Method” of $5 per sq. ft. of usable office space, up to 300 sq. ft. If the simplified method was used in the prior year and actual expenses are being used for the next year, depreciation of the office needs to be computed using the appropriate optional depreciation table.

The regular method

  • Report the sq. ft. of the room or the area used exclusively for business (or used regularly for a daycare business, or for storage of inventory or product samples)
  • Report the sq. ft. of total area of the home.
    • This gives you the business portion percentage

Report the amounts for the entire home for:

  • Deductible mortgage interest (generally limited to the amount of interest paid on a loan balance up to $750,000)
  • Real estate taxes

Some of the above is deductible on Schedule C, line 30 as expense for business use of your home. The “excess” of these items might go to Schedule A, for possible use as an itemized deduction.

  • Excess mortgage interest (generally the amount of interest paid on the portion of a loan balance in excess of $750,000)
  • Homeowner’s or renter’s insurance
  • Rent
  • Inside repairs and maintenance (such as maid services and cleaning supplies)
  • Outside repairs and maintenance (such as yard work and landscaping) if business customers come to the office (a separate entranceway for customers is a nice touch documenting its legitimacy)
  • Utilities
  • Other appropriate expenses

The above assume the costs benefit the entire home, and therefore the business use percentage is applied against those costs. But for anything above that is a more direct cost (for example: a separately metered electric panel for office use only) then that cost can be allocated directly.

  • After allocating a fair cost to the non-depreciable land or building lot, compute depreciation on the structure, using a 39-year depreciable life.

Limit the current year deduction on all of the above to the net income plus the net gain (usually Schedule C, line 29 plus applicable amounts from Form 4797, Form 8949 and Schedule D)

Who may claim the deduction

(not an exclusive listing)

  • Individual owner of a trade or business (Schedule C)
  • SMLLC (if a disregarded entity, using Schedule C)
  • General Partner of an General Partnership, if the partnership agreement requires it
  • Managing Partner of a Limited Partnership, if the partnership agreement requires it
  • Managing Member of an LLC taxed as a partnership, if the operating agreement requires it
  • An S-Corporation if the S-Corporation itself owns the home
    • a shareholder of an S-Corporation generally may not claim a deduction. Rather the shareholder may do the computations (see above) excluding the part about depreciation and send a chit to the S-Corporation for a direct and exact cash reimbursement to be paid to the shareholder before the end of the year