Why Are There Two Ways to Claim Home Office Deductions?

Michelle Mire

Blogmaster, content expert and marketing guru at Wagepoint.
Michelle is having fun (seriously I am) extolling the virtues of small business payroll and generating articles with actionable advice for small businesses and startups. Michelle probably needs to get out a little more often.

Choice is a good thing. In the case of home office deductions, the Internal Revenue Service agrees—which is why you can use a simplified or regular method (Form 8829) to file home office deductions.

The Simplified Method

The simplified method lives up to its name. All you have to do is multiply the square footage of your home office by $5. The catch is that the maximum amount you can write off is $1,500. If you’re just starting out or using your office for a side hustle, this might be the right method for you.

The Regular Method Using Form 8829

If your home office expenses are more than $1,500, you’ll want to use Form 8829. To apply this method, calculate percentages of the various expenses you want to claim. This is likely a better option for more mature or complex home businesses.

As part of this process, expenses are classified as direct or indirect. Direct expenses are the expenses that are clearly and definitively tied to the space that you use as a home office. Examples include completed painting projects or renovations that were exclusively done for your home office. You may claim 100% of direct expenses.

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Indirect expenses are costs related to the home or property that houses your home office. These include things like utilities and mortgage or rent payments. You may only claim a percentage of indirect expenses, which is the total square footage of your home divided by the square footage of your home office.

One limit to the regular method is that you can’t claim more than you earned while working in your home office. Your claim must be proportional to the time you spend working in your home office.

Which Is Better—the Simplified or Regular Method?

It depends. Factors to take into consideration include:

  • The size of your home office. If your office is 300 square feet or less, the simplified method is likely best. But if you’ve got a bigger office, you could get a larger deduction using the regular method. Know that there’s no limit to the size of home office using Form 8829.
  • Mortgage and rental rates. If you live in an area where the cost of rent or homeownership is traditionally high, you might be able to get a larger deduction using the regular method.
  • Home depreciation. For the simplified method, you can’t deduct depreciation. Real estate taxes and the interest on your mortgage can be claimed using Schedule A.

    If your home has depreciated, you may want to consider using Form 8829. And if you ever sell your home at a profit, this deduction will be taken into consideration in calculating your resulting tax liabilities.
  • Recordkeeping. If this isn’t your forté, the simplified method is for you. The regular method requires that you keep detailed records of each expense. (Even if you don’t send the receipts in with your filing, you need to keep them on hand for a few years, just in case.)
  • How much you really like filling out forms. The form for the simplified method has six lines within a Schedule C. Compare that to that Form 8829, which has 43 fun-filled lines to complete. When you use Form 8829, it must accompany your Schedule C when you complete your filing.

Am I Locked in Once I Pick a Method?

No, you are not. You may use either method in a given filing year. If the simplified works better one year, use it. If regular works better the next, it’s your call. The only restriction is that you can’t use both methods in the same filing year. It has to be one or the other.

Am I More Likely to Get Audited When I Claim a Home Office Deduction?

The risk is likely no larger than for any other type of deduction you claim. Studies have shown that there’s no conclusive evidence of a greater risk. But, if you do a quick search, you see a lot of concerning headlines. In the end, if you’ve been honest and kept good records, you don’t have much to fear from an audit anyhow.

The Definitive Solution

The best way to know which method to use is to run the numbers. Add up your home office expenses. If they’re more than $1,500, consider using the regular method. If not, use the simplified method.

As your business grows and your calculations become more complicated, tools like QuickBooks, QuickBooks Online, or QuickBooks Self-Employed can help you streamline your financial processes (and recordkeeping). If you’re not one for mainstream solutions, there are also tools like Xero, Sage, Wave, FreshBooks, and many others.

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Finding yourself a trusted accountant or bookkeeper can also be invaluable. As many firms switch to the cloud, they can suggest a primary small business accounting software and a range of key apps for functions, like time tracking, data entry, payables and receivables, and payroll.

The better your tools and processes, the more you’ll be able to maximize your deductions.

Other Points to Keep in Mind

In all of this, it’s important to note how the IRS defines a home office. The two key concepts are regular and exclusive use.  Regular means that you must routinely use this portion of your home for business. Exclusivity is a bit less tangible. In essence, it implies that the area where you work must be identifiable as a space used exclusively for business.

A home office doesn’t have to be a room within your home. It can also be a garage or outbuilding like a studio or shed.

If your employer allows you to work from home or you’re a remote worker, you may also claim a home office deduction. But if you’re a full-time remote worker, this is a bit easier to prove. If you only work a few days a week from home, it’s harder to substantiate.

The standard for someone who’s allowed to work from home part of the time is if the home office is maintained for the convenience of the employer.

Nice and vague, isn’t it?  

Essentially, it means that this home office is necessary for the employer’s business to function and for the employee to fulfill their responsibilities. Documentary evidence is as simple as getting a letter from your employer confirming the need for you to work at home.

What If You Don’t Fit the Textbook Definition of Home Office

On a general level, caregiving is a yes and rental or hospitality use is a no.

If you run licensed home daycare or provide elder care, you may take the home office deduction using either method.

On the other hand, any expenses related to any space in your home that you use as a hotel, motel, inn, or similar business do not fall under the home office deduction.

Does Storage Count as a Business Function?

You may use the home office deduction if part of your home is dedicated to storing business materials, as long as these items are part of your business inventory and you use this space as storage on a regular basis.

Know the Rules That Apply to You and Your Industry

Every industry has its own nuances within the tax code. And the traditional office isn’t so traditional anymore. The best thing to do is to learn as much as possible. If you don’t know, look it up. If it’s unclear, ask a qualified expert.

Start by seeing what the IRS has to say, Publication 587—Business Use of Your Home (Including Use by Day-Care Providers).

With resources like the Fundera Ledger and other helpful small business blogs, you can also research key topics and look for friendlier explanations of the nuances deducting home office expenses.

Disclaimer: This article is intended to be informational. It does not replace the expertise of accredited business professionals.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Michelle Mire

Blogmaster, content expert and marketing guru at Wagepoint.
Michelle is having fun (seriously I am) extolling the virtues of small business payroll and generating articles with actionable advice for small businesses and startups. Michelle probably needs to get out a little more often.

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