by Jenifer Carmody Stiebel, CPA
The simplified method is intended to reduce the burden on small business owners of the required record keeping, calculations, and allocation requirements under the traditional method. A taxpayer must still meet the criteria set forth for the business use of the home office which includes regular and exclusive use of the home office for business or where client, customer or patient meetings occur.
Traditionally, when taking a deduction for business use of the home, a taxpayer is required to keep records of the actual expenses of the entire home. The taxpayer then needs to determine the percentage of the home devoted to business activities and apply that percentage to the total expenses, to determine the allowable home office deductions.
In addition, for those taxpayers who itemize, home-related expenses such as mortgage interest and property taxes are required to be allocated between the business use deduction and itemized deductions. A deduction for depreciation of the portion of the home used for business can also be calculated, although depreciation may be recaptured if the home is later sold.
The simplified method allows a standard deduction of $5 per square foot of the part of the home used for business up to a maximum of 300 square feet. Records are not required for the actual expenses and depreciation is not taken. Likewise, since no depreciation is taken in the simplified method years, if the home is later sold, depreciation recapture won’t apply for those years.
Another advantage under the simplified method is that expenses such as mortgage interest and property taxes do not require allocation and may be claimed in full as an deduction on Schedule A if the taxpayer is able to itemize.
The simplified method can be elected in any tax year by filing a timely, original tax return for that year and using the simplified method. Once a method is chosen for a tax year, it cannot be later changed to a different method for that year. However, the method can be changed from year to year.
With either method, the amount of the deduction cannot exceed the amount of net income from the business. When using the traditional method, an unused home office deduction can be carried over to be used in the next traditional method year. If the simplified method is used, any unused deduction may not be carried over to subsequent years.
Jenifer Carmody Stiebel, CPA, joined Dennis, Gartland and Niergarth in 2012. As a staff accountant Jenifer’s emphasis is in the tax department. Jenifer graduated summa cum laude with a Bachelor of Science in Accountancy from Ferris State University.
For further information on the home office deduction or questions related to your specific tax circumstances, please contact Dennis, Gartland & Niergarth.