Beginning in 2014, there is a new “Simplified Option” for 
computing the business use of your home. It can reduce recordkeeping burden for some taxpayers. However, there are restrictions which may limit the deduction to much less than is actually spent on your home office. Taxpayers can still use the standard or “Regular Method” though. But regardless of which one is used, there are two basic requirements for your home office to qualify as a deduction on your tax return.
1) Regular and Exclusive Use.
You must regularly use that part of your home exclusively for conducting business.
2) Substantial Place of Your Business.
You must show you use that part of your home substantially and regularly to conduct business.
These apply primarily if you own your own business or work for yourself; however, if you are an employee, you may also qualify for a deduction by meeting the above requirements plus the following two requirements.
- The use must be for the convenience of your employer
- You must not rent any part of your home to your employer and in turn use the rented portion to perform services for your employer
The “Simple Option” only allows for up to 300 square footage of office space (i.e., you might have 350, but you still need to calculate based on 300). You are allowed $5 per square foot, no depreciation deduction, and any loss portion may not be carried to future years (and in fact, if you have a loss carryforward from a previous year, you forfeit it).
The “Regular Method” is based on actual expenses or a percentage thereof. You are allowed depreciation expense, and loss portion may indeed be carried to future years as a deduction. . “Regular Method” expenses you can deduct are either direct or indirect. Direct expenses are things such as painting, repairs, wiring, window blinds, flooring pertaining to your actual office area (which may be the entire room, or the part of the room used as an office). Office supplies? Well, that expense should be reported in a separate area of your tax return. Indirect expenses are those for which you take a percentage of the entire expense based on the percentage you use your home for business. These are items such as insurance, utilities, and general repairs among others. You can even deduct a percentage of depreciation as an indirect expense; however, there are future tax consequences concerning depreciation you will want to take into consideration.
So is a home office a red flag on your tax return? No, especially depending on your industry (for what reason you’re claiming a home office deduction). However, regardless of whether it is an area of scrutiny or not by the IRS, there is little to worry about if fully understood and calculated correctly on your tax return.
Please feel free to contact E. Daniel Miller, CPA, PC for a free initial consultation. You may reach us at (888) 734-3933 or tax@edanielmillercpa.com.
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