How does the Home Office Tax Deduction affect you?
Did you know that the home office tax deduction applies to the business use of a home, and that the space itself may not actually be an office? This category also includes using part of a home for storing inventory. An example is a wholesale or retail business for which the home is the only fixed location. So, let’s say you own a day care center, personal trainer, dentist, artist, fruit stand, hair dresser or party planner these are a few types of home businesses. For purposes of tax reform, a home-based business is a physical meeting place for interacting with customers, patients, or clients; or the principal place of business for any trade or business.
Qualifications for the Home Office Tax Deduction?
Generally, except when the home use is to store inventory, an office area must be in use on a regular and continual basis. The owner must restrict the home business office or space exclusively to the trade or business (i.e., no personal use). Two methods can be used to determine a home-office deduction: the actual-expense method and the simplified method.
Actual-Expense Method versus Simplified Method for the Home Office Tax Deduction
Actual-Expense Method
The actual-expense method prorates home expenses based on the portion of the home that qualifies as a home office. Square footage is generally the basis. Therefore, expenses such as mortgage interest, real property taxes, insurance, heating, electricity, maintenance, and depreciation, all apply. In the case of a rented home, rent replaces the interest, tax, and depreciation expenses. Aside from prorated expenses, 100% of directly related costs, such as painting and repair expenses specific to the office, can be deducted.
Simplified Method
The simplified method allows for a deduction equal to $5 per square footage of the home that is in use for business. The maximum of square footage is up to 300 square feet. This calculates to a maximum simplified deduction of $1,500.
What is the income limit to claim the home office deduction?
Many people do not realize it is net income that determines home office deduction elibility, not the business activity’s gross income. The gross-income limitation is equal to the gross sales minus the cost of goods sold. This amount is deducted on a self-employed individual’s business schedule.
What is the Employee Deduction for home office use?
So, if you own a business and operate that business out of your home, here is the good new. Under the tax reform, you are still able to take the home-office deduction as long as you are a self-employed taxpayer. The bad news is that this deduction is no longer available for employees, at least for 2018 through 2025. Why the reason for this home office deduction change? For an employee, the IRS considers a home office an employee business expense (a type of itemized deduction). Congress suspended this deduction as part of the tax reform.
Do you need help with business tax planning?
Maybe you have concerns or questions about how the home office tax deduction applies to your specific circumstances. I encourage you to me, Alex Franch, a call at 781.849.7200 or email the office at contactus@worthtax.com. You can also book an appointment online here and you can meet with any of our tax experts.
Alex Franch, BS EA
Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning strategies.
Mr. Franch is licensed by the Financial Industry Regulatory Authority (FINRA). He holds a Series 6, 63, 65, and 7, and by the Commonwealth of Massachusetts Division of Insurance.
Alex Franch is a registered representative of, and offers securities and investment advisory services through, Commonwealth Financial Network. He is a registered broker-dealer, Member FINRA/SIPC.
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