Simplified Home Office Deduction
Many American taxpayers who work from home opt to use the IRS's simplified home office deduction method. Below, you'll find a complete guide to this tax election.
Taxpayers can elect a simplified deduction for the business use of the taxpayer’s home. The deduction is $5 per square foot with a maximum square footage of 300. Thus, the maximum deduction is $1,500 per year. Here are the details of this simplified method:
Annual Election
A taxpayer may elect the simplified method or the regular Sec 280A method on an annual basis. Thus, a taxpayer may freely switch between the methods each year. The election is made by choosing the method on a timely filed original return and is irrevocable for that year.
No Form 8829
Instead of completing Form 8829, Expenses for Business Use of Your Home, a self-employed taxpayer using the simplified method enters their home’s total square footage and the office square footage directly on Schedule C next to line 30 in Part II. The Schedule C instructions include a worksheet for figuring the amount of the deduction using the simplified method.
Depreciation
When the taxpayer elects the simplified method, no depreciation deduction (including additional first year or Sec 179) for the home is allowed and the depreciation for the year is deemed to be zero.
Additional Office Expenses
Additional office expenses such as utilities, insurance, office maintenance, etc., are not allowed when the simplified method is used.
Home Mortgage Interest and Taxes
Prorated home mortgage interest and taxes are not allowed as an office expense when using the simplified method., Instead, 100% of the home mortgage interest and taxes are deductible as usual on Schedule A.
Deduction Limited by Business Income
As is the case with the regular Sec 280A method, under the simplified method the home office deduction is limited by the business income. For the simplified method, the deduction cannot exceed the gross income derived from the qualified business use of the home for the taxable year reduced by the business deductions (deductions unrelated to the qualified business use of a home)., However, unlike the regular method, any amount in excess of this gross income limitation is disallowed and may not be carried over and claimed as a deduction in any other taxable year.
Sec 280A Home Office Carryover
Cannot be used in a year the simplified method is used. The carryover continues to future years and can only be used when the regular method is used.
Example – Julie used the regular home office method on her 019 return and due to the business income limitation was unable to claim $500 of her direct and prorated direct expenses and $800 of depreciation, so she had a carryover of $1,300. On her 2020 and 2021 returns Julie used the simplified method and none of the carryover expenses were deductible. For 2022 she is again using the regular method and will be able to include the $1,300 of carryover expenses in her computation.
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Qualifications
A taxpayer must still meet the Sec 280A qualifications to use the simplified method.
Reimbursed Employee
The simplified method cannot be used by an employee who receives advances, allowances or reimbursements for expenses related to qualified business use of his or her home under a reimbursement or other expense allowance arrangement with the employer.
Determining Square Footage
To determine the average square footage of the business, use these guidelines:
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Square Feet Maximum - Never use more than 300 square feet for any month, even if the taxpayer has multiple businesses. Where there are multiple businesses use a reasonable method to allocate between businesses.,
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Determining Average Square Feet for the Year - Use zero for months where there was no business use, or where the business was not for a full year.
15-Day Minimum
Don’t count any month in which the business use is fewer than 15 days.
Example - A calendar-year taxpayer begins using 400 square feet of her home for business on July 20 and continues using the space as a home office through the end of the year. Her average monthly allowable square footage for the year is 125 square feet (300 x 5 months = 1500/12 = 125). 300 was used instead of 400 in figuring the average because 300 is the maximum square footage that can be used. Since usage in July was fewer than 15 days, only 5 months are counted (Aug. – Dec.).
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Multiple Businesses
Where there are multiple businesses only one method may be used for the year, either the regular or safe-harbor.
Mixed Use Property
A taxpayer who has a qualified business use of a home and a rental use for purposes of § 280A(c)(3) of the same home cannot use the simplified method for the rental use.
Move
A taxpayer who conducts business from a home office and moves during the year and uses part of the new home for the same business may use the simplified method for business use of one home and the regular method for business use of the other home. (Sch. C instructions, 2021, page 13, Example 3) When there is a move during the year, the average allowable square footage for the simplified method will generally be less than the 300 square feet maximum.
Taxpayers Sharing a Home
Taxpayers sharing a home (for example, roommates or spouses, regardless of filing status), if otherwise eligible, may each use the simplified method, but not for a qualified business use of the same portion of the home.
Depreciation Rate When Switching Methods
When the simplified method is used, and subsequently the taxpayer switches back to the regular method, then use the depreciation factor from the appropriate optional depreciation table as if the property had been depreciated all along.