Since 2013, there have been two ways to calculate the deduction for the business use of the home, also called the home office deduction.
The first way is using actual expenses. You calculate the percentage of space in the home that is exclusively used for business purposes. Expenses like insurance, utilities, mortgage interest, and real estate taxes are multiplied by this percentage to determine potential home office deductions. The potential deductions are subject to limitations based on gross income from the business use of the home and other deductions taken in connection with the business. The instructions for Form 8829, Expenses for Business Use of Your Home, and Publication 587 provide the detailed guidelines for using this method, which was previously the only method for taking this deduction.
In 2013, the IRS released Rev. Proc. 2013-13, which offers a new safe harbor method, that is much simpler to calculate. The square footage used exclusively for business, up to 300 square feet, is multiplied by $5. The actual expenses related to business use of the home are assumed to be included in this safe harbor amount, so you only get to take the safe harbor deduction and business expenses not related to the business use of the home on the tax return.
The maximum potential home office deduction is $1,500 from the safe harbor method, but you can also deduct mortgage interest, real estate taxes, and casualty losses on Schedule A, even though a portion of those itemized deductions would have gone toward the home office deduction under the actual expense method. The election of which method to use is not binding on future years but is irrevocable once submitted for the current tax return year.
If you have been using actual expenses in the past, compare the deduction on your latest tax return to what it would have been with the simplified method. If the result is similar, then the easier calculation and record-keeping involved may make the simplified method the better choice overall.
Contact your Henry+Horne advisor with any questions.
Brandon Harbeke, CPA