Article written by:
Tyler Gabalski, CPA
The home office deduction can be a valuable tool for individuals who use a portion of their home as their principal place of business. Many individuals, who had previously claimed it as an itemized deduction on Schedule A, saw this deduction go away in 2018. The Tax Cuts and Jobs Act eliminated miscellaneous itemized deductions (a group of itemized deductions able to be claimed for amounts exceeding 2% of Adjusted Gross Income when aggregated) for tax years beginning after 2017 and before 2026. This group included many expenses such as certain tax preparation fees, certain investment advisory fees and unreimbursed employee expenses. In some circumstances, the home office deduction qualifies as an unreimbursed employee expense if the home serves as the individual’s principal place of business.
Even though employees may have lost the ability to get the deduction, sole proprietors and owners of single-member LLCs who report business income on Schedule C may still utilize the home office deduction if the office use relates to that business. In order to qualify for this deduction, business owners must be able to designate a portion of their home which is for regular and exclusive use of their business and the home must qualify as their principal place of business.
The IRS offers two methods of calculating the home office deduction, the regular method and simplified option. The regular method is generally calculated by identifying certain expenses that apply to the whole home (including mortgage interest, insurance, utilities and repairs) and multiplying them by the amount of the home designated as the home office. This is usually done by a square footage allocation. Additionally, any direct expenses such as repairs only in the home office are 100% deductible.
The simplified method is also available to take the burden away from taxpayers of tracking all expenses that could be included under the regular method. The simplified method is calculated by multiplying $5 times the square footage of the home office up to 300 square feet. For example, a taxpayer with a 250 square foot home office would receive a $1,250 deduction under this method.
Please contact your GBQ tax professional to discuss how the home office deduction and other recent changes could impact you or your business.