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 referred to as the home office deduction, can be calculated using the standard method or the simplified method.
To use the standard method for calculating the home office 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.
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 home office deduction (simplified method)
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 value of the home office deduction using the simplified method is $1,500 per year. This is based on a rate of $5 per square foot for up to 300 square feet. But, 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 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 your client, you 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 a client’s 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
Your client moved halfway through the year
The simplified method can only be used for one home per tax return only. So, if your client works out of two separate residences or moves partway 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 are filing 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.
What you’ll need to do in this case is calculate the average monthly allowable square footage. To do this, add up the amount of square feet they used each month, and then divide that number by 12 (for 12 months in a year). If the qualified business use was less than 15 days in 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.
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 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 of them meets the requirements. However, the maximum area for all the business uses combined is still 300 ft2. As the preparer, you’ll need to use the same method to calculate the home office 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 are working 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.