Question

Your client, Nora, has a 300-square-foot room in her 2,000-square-foot home that she uses as an office for her bakery business for administrative functions such as paying bills and ordering supplies. She has heard of other small businesses taking the home office deduction, as she does not want to miss out on any deductions.

Write a short memorandum advising Nora on whether she can take any deductions for her home office, detailing your conclusion. You are allowed to make some assumptions in order to document your findings.

Answer 1

home office deduction is available to small businesses for expenses like property taxes, repair & maintenence, insurance, loan interest etc.

there are two methods to calculate allowable home office deduction -

1) Simplified method - under this method, a prescribed rate of $5 per square foot used for office purpose. But this method is applicable only when the home area used for business is not more than 300 square foot.

2) Actutal expense method - under this method, the expenses directly attributable to office area are completely allowed and the common expenses of the entire home is allowed for the area used in office as a percentage of total home area.

The choice of which method to use is with the taxpayer. The taxpayer can choose the method beneficial to him.

In the given case, since Nora's home office area is 300 square foot, she is eligible for Simplified method. Deduction under this method would be $5*300 = $1,500

She can also choose Actual expense method. In this method, the expenses directly attributable to 300 square foot area will be completely allowed to her and the common expense will be allowed to an extent of 15% (300/2000). She should choose this method when the allowable deduction under this method is more than $1,500.