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The home office deduction for small business owners

Are you a small business owner who works from home?

If you are a self-employed individual who utilizes a portion of your home regularly and exclusively for business activity, and that area is your principal place of business, the home office deduction is available to you in 2019.

Can you write that off? Find out!

Here’s what you need to know:

  • The deduction is available to taxpayers utilizing a portion of their home to meet patients, clients, or customers in the normal course of business.
  • The deduction is available to both homeowners and renters.
  • The deduction applies to separate free-standing structures used exclusively and regularly for business (i.e., a studio, garage, or barn).
  • Expenses associated with the use of a portion of your home include mortgage interest, real estate tax, depreciation, insurance, rent, repairs, utilities, janitorial, security, and casualty loss.
  • The home office deduction is no longer available to employees.

There are two methods available to calculate the deduction, which is reported on line 30 of Schedule C:

  • The standard method allocates the expenses of operating the home to the business using the percentage of the home devoted to business activities. This method is the more complex of the two, as it requires the determination of actual expenses and maintenance of records.
  • As an alternative to the standard method, the simplified method multiplies the prescribed rate of $5 per square foot of business space utilized by the qualified business area, limited to 300 square feet (or $1,500). This method requires less paperwork and recordkeeping, but does not allow for a depreciation deduction or recapture of depreciation upon the sale of the home.

If you’ve opted to utilize this deduction, keep in mind that otherwise nondeductible expenses (i.e., insurance, utilities, and depreciation) allocable to the business are limited to your gross business income for the year, less otherwise deductible expenses allocable to the business (like mortgage interest, real estate taxes, and casualty losses) and any additional direct expenses, but that any expenses in excess of that amount may be carried forward to the next year.

For more information on this deduction, please refer to the following link:

https://www.irs.gov/pub/irs-pdf/p587.pdf

As always, please consult your tax advisor before making any tax decisions.

Micky Murphy

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