If your client is self-employed and uses part of their home for business purposes, they may be eligible for a tax write-off on their federal income tax return. This tax break also called the home office deduction, can be calculated using the standard or simplified method.
To use the standard method for calculating the home office tax deduction, you would need to know your client’s actual expenses and the square footage of the space as a percentage of the total in the home. The process is somewhat complicated. For this reason, many tax preparers and their clients prefer to use the simplified method instead.
What are the IRS rules for the home office deduction?
To qualify for the home office deduction, your client must meet the following IRS criteria:
- The designated home office space must be used exclusively for business purposes.
- The space must be used regularly for business activities.
- The home office must be your client’s principal place of business or used for meeting clients or customers.
- If the home office is a separate structure, like a detached garage, it must be used exclusively for business purposes.
How to calculate the home office deduction using the simplified method vs. the standard method
When determining the home office deduction, there are two distinct methods to choose from: the simplified method and the standard method. Here’s a comparison of both approaches to help you decide which one may be more beneficial for your client.
Simplified method: To use the simplified method for the home office deduction, multiply the designated home office square footage (up to 300 square feet) by the standard rate of $5 per square foot.
Standard method: To use the standard method, calculate the percentage of your client’s home used for business by dividing the square footage of the home office by the total square footage of the home. Multiply this percentage by your client’s actual home office expenses, such as rent, utilities, and mortgage interest.
Generally, tax preparers choose the method that results in the higher deduction amount for their client.
What is the simplified method for the home office deduction?
The simplified method for the home office deduction is a more streamlined approach that allows your client to claim a standard deduction of $5 per square foot of their designated home office space. This method is particularly convenient for taxpayers who don’t want to track and itemize their actual home office expenses.
How to calculate the home office deduction (simplified method)
To calculate the deduction with the simplified method, you will multiply your client’s total home office space by the rate per square foot for the current tax year. As this article is published, the rate is $5 per square foot for up to 300 square feet of home office space.
Limitations to the simplified method home office deduction
Not every home-based business is eligible to claim the home office deduction. To qualify for the write-off, a client’s home office must meet these requirements:
- The space must be their principal place of business.
- They must use the space regularly.
- The space must only be used for business purposes.
The maximum amount of home office tax deduction your client can claim using the simplified method is $1,500 per year. This limit is based on a rate of $5 per square foot for up to 300 square feet. However, your client must also have earned enough gross income from their business to qualify for the deduction. If your client’s business deductions (not including the home office) are equal to or more than their gross income from the business, then they cannot also claim the home office deduction.
When you elect to use the simplified method for the home office deduction , your client cannot deduct any depreciation or section 179 expense for the space being used as the home office.
Actual business expenses that are not tied to the home office – such as marketing and advertising or supplies and equipment – are still deductible.
What you need to calculate the home office deduction
If you are calculating the home office deduction and you elect to use the simplified method, ask your client to provide the following information:
- The area (in sq. feet) of the home office space that was used exclusively for business*
- Gross income earned from the business use of their home
- Additional business expenses unrelated to the home office
*If your client’s business is part-time or seasonal, or if the size of the space changed (expanded or got smaller) at some point during the year, you’ll also need to know:
- The size of the new area
- The number of days they conducted business from their home office each month
Special circumstances that impact the home office deduction
Your client moved halfway through the year
The simplified method for home office deduction can only be used for one home per tax return. If your client works out of two separate residences or moves part way through the year, you can apply the simplified method for the qualified area in one home, but you’ll use actual expenses and the standard method to calculate the deduction for the other home(s). If you file a Schedule C, you’ll use Form 8829, Expenses for Business Use of the Home. See how to file Form 8829 with TaxSlayer Pro.
Your client only uses their home office for part of the year
Say your client runs a seasonal business or they started using a qualified business office space part-way through the year. They can still claim the home office deduction.
In this case, you’ll need to calculate the average monthly allowable square footage. To do this, add up the total square footage used each month and divide that number by 12 (for 12 months in a year). Note: If the qualified business use was less than 15 days a month, use 0 for that month.
For example, if the client has a home office that is 250 square feet and they use it for four months, you’ll calculate the average monthly square footage first by adding
250 + 250 + 250 + 250 = 1,000
Then you’ll divide by 12 months
1,000 / 12 = 83.3 (average monthly square footage)
Note: Even when you are calculating an average, the maximum area your client can claim using the simplified method is still only 300 square feet. For example, if their office actually measures 425 square feet, and they use it for six months of the year, you must still base your average on a maximum of 300 ft2.
(300 + 300 + 300 + 300 + 300 + 300)/12 = 150 (average monthly square footage)
Your client downsized their home office space
The same principle applies when your client’s home office space changes. You will need to add up the area of the home office space used month by month and divide the total by 12. This calculation will give you the average monthly allowable square footage for the entire tax year.
Your client operates more than one business out of their home
Your client can use the simplified method to claim different spaces within the home if each meets the requirements. However, the maximum area for all the business uses combined is still 300 square feet. As the preparer, you’ll need to use the same method to calculate the home office tax deduction for each of their businesses in the same tax year. In other words, you can’t use the simplified method for one qualified space but use the standard method for a different business/ different qualified space.
Your clients are married and both work from home
If your clients are married and both spouses work from their home, then you can use the simplified method for each qualified office space. However, the spouses cannot claim the same space twice, and the maximum square footage they can deduct is still 300 combined. In other words, they must have separate qualified work areas, and the total area claimed cannot be larger than 300 square feet.
Simplified method home office deduction FAQs:
Can I use the simplified method if my client has a separate home office structure?
Yes, you can use the simplified method for the home office deduction even if your client’s home office is in a separate structure, such as a detached garage or studio.
What is the maximum square footage my client can claim for the simplified method?
The maximum square footage your client can claim for the simplified method is 300 square feet.
Can I use the simplified method if my client shares a home office with other household members?
Yes, you can use the simplified method even if your client shares their home office with other household members. However, they cannot claim the deduction for the same space another member of the household uses.
Can my client switch between the simplified and regular methods during the year?
No, your client must choose one method for the entire tax year. They cannot switch methods mid-year.
For more information on how to calculate the home office deduction and other tax topics, check out our extensive online library of exclusive resources for tax preparers.
