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Taking the Home Office Deduction: Tips for Taxpayers

Effective January 2018, as a result of the Tax Cuts and Jobs Act, taxpayers who previously took the home office deduction as employees will no longer be able to deduct the same type of Schedule A miscellaneous expenses on their tax returns. This change does not affect those who are self-employed, however; and self-employed taxpayers will continue to be able to make a home office deduction on Schedule C if eligible.

To qualify for the Schedule C home office deduction, self-employed taxpayers must pass two requirements:

  1. Exclusive Use: A taxpayer must use this part of their home regularly for conducting business; and
  2. Principal Place of Business: A taxpayer must be able to show that the use of their home is the principle place for conducting their business, even if they have another outside office. Usually, a taxpayer can qualify if all administrative and management duties are conducted in the home office.

For taxpayers who meet these criteria, there are two deduction methods from which to choose.

Regular Deduction: This method uses actual costs incurred during the tax year for your home office. (Expenses are allocated using a percentage of the taxpayer’s home office square feet over the overall home square feet.)

Types of Expenses (reported on Form 8829: Expenses for Business Use of Your Home)

  • Direct Expenses: These are expenses related only to the taxpayer’s business within the home, and they are fully deductible. Examples would include repairs and painting done in the home office.
  • Indirect Expenses: Costs related to keeping and running taxpayer’s home. Since the taxpayer is using these part of their home as a home office, a portion of these expenses can be deducted as non-personal expenses and deducted on Schedule C. These expenses are computed using the percentage of your home used for business. Examples: insurance, utilities, general repairs, property taxes mortgage interest and depreciation.

Mortgage Interest and Property Taxes*
*Under the Tax Cuts and Jobs Act, the taxpayer is still able to deduct his/her home office share of mortgage interest and property taxes without regard to the imposed limitations on Schedule A.

Safe-Harbor Method: The basis of this simple deduction method is a computation using a standard dollar amount ($5) times the square footage of your office space. This deduction is capped at $1,500, making the maximum space for which you could make this deduction 300 sq. ft.

It’s worth noting that a taxpayer does not have to use the same deduction method year-to-year; so you can decide to utilize the deduction method that is most beneficial for your scenario each tax year. You should be aware that the IRS limits the amount in home office deductions you can take so that your total home office expenses do not exceed your total business income. You are, however, able to carry over such expenses into the following year.

If you plan to take the home office deduction on your tax returns (assuming you meet the eligibility requirements), it’s essential to keep detailed records and plan ahead. This will allow you to ensure that you’re taking any and all steps necessary to make the best decision about which deduction method to use and will help you to be sure you will qualify for the deduction itself. It’s recommended that you keep detailed expense logs for home office-related expenses in the form of original receipts and checks; and, if you’re unsure about a certain expense, keep a record of it anyway just in case and ask your trusted tax advisor for further guidance.

Here at FF&F, our team of experienced tax professionals are well-equipped to answer any questions you may have about qualified home office expenses and choosing the method by which you’ll take the deduction. For more information on this topic, or our services, please contact us at info@fffcpas.com or 212-245-5900.

Allie Schettini is a Tax Associate who has been with FF&F for over 2 years. She services high net worth individuals and business entities including partnerships, trusts and nonprofits, although her focus area is large, multinational and multistate corporations.