Regardless of their line of work, self-employed persons often use a small portion of their personal residence for business purposes. It may only entail the use of a desk in one room. Self-employed tax filers are sometimes entitled to a home office deduction for the portion of a residence used for their work.
Although there are exceptions for a day care business or the storage of inventory, the designated area must be used exclusively for work purposes. If the area is used occasionally for personal uses, it generally does not qualify as a deduction. The designated work area does not have to be a full room and can be as simple as the floor space occupied by a table or desk.
The deduction for a home office is entered as an expense on IRS Schedule C, the form used to report self-employment activity. Schedule C is a summary of income and expenses used to determine your profit or loss. There are two methods of calculating a home office deduction.
The regular method
A deduction for the cost of a home office essentially apportions expenses based on square footage. The area used exclusively for business is compared to total square footage of the structure to determine the business use percentage. That percentage of qualifying household expenses, such as utilities and property taxes, is deductible.
An expense for depreciation is also allowed for the portion of the house used for business. Depreciation is a deduction for the gradual obsolescence of a business asset. The total home office deduction is calculated on IRS Form 8829 and then entered on Schedule C. However, a simpler deduction option is now available.
The simplified method
Starting with the 2013 tax year, an alternative deduction method is available for home office areas not exceeding 300 square feet in size. A standard $5 deduction is allowed per square foot. Form 8829 is not used, and the deduction for up to $1,500 is entered directly on Schedule C.
The use of the simplified method does not require depreciation of the area used for business, and actual expenses of the home are not apportioned. A home office deduction does not affect your ability to deduct the routine expenses of office supplies.
Either method may be used for any tax year, but the method cannot be changed after the return is filed. A home office deduction cannot be used to create a loss. The deduction is limited to the amount of profit otherwise generated before the inclusion of the home office. For more information, contact The Callen Accounting Group, PLLC or a similar organization.