Question

Henrietta is self-employed and would like to know what kind of deduction she could get for her home office. She has gross income from her business of $150,000. Her total home square footage is 2,500. The square footage of her office is 150. Total utilities $600. Total home mortgage interest $10,000. Total real estate taxes $4,000.

a. Explain to Henrietta the options for calculating the home office deduction. b. Based on the information provided what would be Henrietta’s deduction? c. What information should you discuss with Henrietta regarding the requirements of taking this deduction?

Answer 1

Answer a):

There are two options available for determining value of deduction:-

1. Simplified option in which you aren’t deducting actual expenses. Instead, the square footage of your space is multiplied by a prescribed rate. The rate is $5 per square foot for up to 300 square feet of space.
2. The regular, more difficult method values your home office by measuring actual expenditures against your overall residence expenses. You can deduct mortgage interest, taxes, maintenance and repairs, insurance, utilities and other expenses.

Answer b):

Based on information received, we will calculate home office deduction by both options:-

Option I:- As per Revenue procedure, simplified option can be availed if home area used for business doesn’t exceed 300 square feet so in this case simplified option can be availed.

Amount of deduction: - 150 sq. ft. * $ 5 per square foot = $ 750

Option II:- In regular option, we can deduct mortgage interest, utilities and taxes proportionate to the office area. So area of home used for office = 150 square foot/ 2500 square foot = 6% of house.

Amount of deduction: - 6% of (Mortgage interest i.e. $ 10,000 + Utilities i.e. $ 600 + Taxes i.e. $ 4,000)

                                  = 6% of $ 14,600 = $ 876

So amount of deduction will be $ 876 as this option will be more beneficial to Henrietta.

Answer c):

There are two preconditions attached to this deduction that is essential for claiming deduction. So we will discuss with Henrietta the same in order to fulfill the requirements of taking this deduction.

First one: Regular and exclusive use: The space you’re using for business must be used exclusively for conducting business.

Second one: Principal place of business: Your home office doesn’t have to be the only place you meet your clients or customers, it must be your principal place of business. That means you use the space exclusively and regularly for administrative or management activities