Question

Explain the home office expense deduction. In your answer you must discuss the regular method and the simplified method. Also explain the deductibility of home office for an employee whose employer requires them to work from home.

Answer 1

Home Office expense deduction: In case you are using part of your home regularly and exclusively for business-related activity, the IRS lets you claim for deduction with associated rent, utilities, real estate taxes, repairs, maintenance and other related expenses.

You may claim for the deduction whether you’re a renter or the owner, and you can use the deduction for any type of home where you reside: a single-family home, an apartment, a condo or a houseboat. You can’t use it for temporary lodging or a hotel

The space must be used exclusively for conducting business. For example, using a spare bedroom as both your office and a playroom for your children wouldn't make you eligible.

There are two methods for determing the deductions-

• Most of the people use simplified option where 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. The IRS introduced the simplified option beginning in the 2013 tax year, because the regular method requires accurate record-keeping that may be difficult for some small-business owners and entrepreneurs.
• 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. Example: Let’s say you paid $3,000 in mortgage interest, $1,000 in insurance premiums and $3,000 in utilities (all indirect expenses) plus $500 on a home office paint job (direct expense) in the 2016 tax year. Your home office takes up 300 square feet in a 2,000-square-foot home, so you’re eligible to deduct indirect expenses on 15% of your home.

Also, apart from the business owners, employed person can also take the home deduction if they maintain the home office for the convenience of their employer. An employee’s home office is deemed to be for an employer’s convenience only if below conditions are satisfied

• a condition of employment
• necessary for the employer’s business to properly function, or
• needed to allow the employee to properly perform his or her duties.

If the employee is working from home for his/her convenience or ease, then it will not be considered for deduction.