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Simple Home Office Deduction Calculation Does Not Make Qualifying Easier

Last week, we talked about the new Simplified Home Office Deduction Calculation.... People claiming the Home Office Deduction will now have the option of taking a flat $5/square foot of home office space (up to a maximum deduction of $1,500), or calculating the deduction based on actual expenses.

This is a very taxpayer-friendly move. Rather than having to pro-rate your utility bills, mortgage and property taxes, you can just take a flat dollar amount per square foot.

 

However do not think it's now easier to qualify for the deduction. Already, I've talked to clients who have said "I heard about the IRS's home office ruling. That's good news for me - I can finally write off my office, right?"

While the IRS has created a simplified calculation option, the rules to qualify for a deduction remain the same. If you didn't qualify for the deduction before, you won't qualify now.

How do I Qualify for the Home Office Deduction

To qualify you must meet two major requirements:

1. Regular and Exclusive Use - The first requirement is that you use your office regularly and exclusively for business. Regularly means you use it often - not necessarily every day, but occasional or incidental use doesn't qualify, even if the room is used solely for business.

Exclusively means that you must use the space you designate as your home office for work only - any non-business usage of the room will disqualify the home office deduction. The only exception to the exclusivity rule applies to running a daycare center in your home or using a part of your home to store inventory or product samples.

2. Principal Place of Business - The second requirement is that your home office be used either as a place of business to meet with clients, customers or patients in the normal course of business or your principal place of business. Your office will qualify if you spend most of your working hours there and most of your business income is attributable to your functions there.

How do I know if my home office qualifies as my principal place of business?

It must be used regularly and exclusively for business, administrative or management activities, AND
You have no other fixed location where you do a substantial amount of administrative work. Examples include calling customers and clients to set up appointments, billing of customers and clients, keeping books and records and calling vendors to purchase supplies.

Occasionally, some of my employees will work from home, can they claim the deduction too?
An employee who works from a home office some or all of the time must meet certain requirements. To qualify for the deduction, the use of a home office must be for your (the business owner) convenience. An example would be if you (the employer) does not have or provide office space for the employee. Employees who work from home a few days a week to take advantage of the company's flexible workplace option are not eligible to take the home office deduction.

Should I calculate actual expenses or take the new standard deduction?

  • Actual Expense Method - With the actual expense method, you can fully deduct expenses that are exclusively for your home office. You may also deduct a percentage of indirect expenses that relate to your residence, including mortgage interest, property taxes, utilities, homeowners insurance, general maintenance and repairs, and depreciation. The amount you can deduct depends on the percentage of your home that you use for business. So, if your house is 2,500 square feet and your office takes up 250 square feet of that space, then 10 percent of your indirect expenses would be deductible.
  • Standard Deduction - With the new standard deduction, you would not have to do any fancy math formulas to figure how much your deduction would be. Using the same office from above, you would times 250 square feet by $5 and your deduction would be $1,250.00. Simple enough?

Success Stories
Before I opened my CPA practice, I was a CFO of a financial services company. I did a $1 billion loan, a $100 million stock swap, a $60 million leveraged buy out, and lots of deals under $30 million. Let's just say I know how to buy and sell businesses and how to finance them. This last year we have put greater emphasis on our business financing and business selling/acquisition practice. Over the last 90 days, we have found and structured debt financing for several clients that will help them expand their businesses. For this month alone we have helped our clients obtain over $4 million in debt financing.

If you are planning on expanding your business, selling your business, or purchasing a business, we can help you. We can assist with getting bank financing and private equity. So give us a call!!!

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