Question

5. Home-office deduction - Chad works for his employer 100% of the time from his home office. There is a desk for him at work but he is allowed to choose where he works from. He also operates a side business for which he is self-employed. He works from the same home office and does all of his self-employed related work there. Is Chad allowed a home-office deduction for either, both or none of these situations?

Answer 1

The home office deduction is one of the more complex deductions. In short, the cost of any workspace that you use regularly and exclusively for your business, regardless of whether you rent or own it, can be deducted as a home office expense. You are basically on the honor system, but you should be prepared to defend your deduction in the event of an IRS audit. One way to do this is to prepare a diagram of your workspace, with accurate measurements, in case you are required to submit this information to substantiate your deduction, which uses the square feet of your workspace in its calculation.

In addition to the office space itself, the expenses you can deduct for your home office include the business percentage of deductible mortgage interest, home depreciation, property taxes, utilities, homeowners insurance, and home maintenance that you pay during the year. If your home office occupies 15% of your home, for example, then 15% of your annual electricity bill becomes tax-deductible. Some of these deductions, such as mortgage interest and home depreciation, apply only to those who own rather than rent their home office space.

You have two choices for calculating your home office deduction: the standard method or the simplified option, and you don’t have to use the same method every year. The standard method requires you to calculate your actual home office expenses. The simplified option lets you multiply an IRS-determined rate by your home office square footage. To use the simplified option, your home office must not be larger than 300 square feet and you cannot deduct depreciation or home-related itemized deductions.

The simplified option might be a clear choice if you’re pressed for time or can’t pull together good records of your deductible home office expenses. However, because the simplified option is calculated as $5 per square foot, with a maximum of 300 square feet, the most you’ll be able to deduct is $1,500. If you want to make sure you’re claiming the largest home office deduction you’re entitled to, you’ll want to calculate the deduction using both the regular and simplified methods. If you choose the standard method, calculate the deduction using IRS form 8829, Expenses for Business Use of Your Home.

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