FAQs - Simplified method for home office deduction

Overview

Q1. What is the simplified method for determining the home office deduction?

A. The simplified method, as announced in Revenue Procedure 2013-13 PDF, is an easier way than the method provided in the Internal Revenue Code (the "standard method") to determine the amount of expenses you can deduct for a qualified business use of a home.

Q2. Why is the simplified method being offered?

A. The standard method has some calculation, allocation, and substantiation requirements that can be complex and burdensome for small business owners. The simplified method is intended to reduce that burden.

Q3. For what years can the simplified method be used?

A. You may elect to use the simplified method for taxable years beginning on or after January 1, 2013.

Selecting a method

Q4. How is an election to use the simplified method made?

A. You elect to use the simplified method by claiming the amount of deductible expenses allowed under the simplified method on your timely filed, original federal income tax return for the taxable year.

Q5. Can the simplified method be used for one taxable year and the standard method be used in a later taxable year?

A. Yes. You may elect to use either the simplified method or the standard method for any taxable year. However, once you have elected a method for a taxable year, you cannot later change to the other method for that same year.

Limitations of the simplified method

Q6. Can you use the simplified method for qualified business uses of more than one home for a taxable year?

A. No. However, if you are otherwise eligible, you may use the simplified method for the qualified business use of one home and the standard method for the business use of any other homes for that taxable year.

Q7. Can actual expenses related to the qualified business use of the home be deducted for a taxable year in which the simplified method is used?

A. No. You cannot use the simplified method for a taxable year and deduct actual expenses related to the qualified business use of the home. The amount allowed as a deduction when using the simplified method is in lieu of a deduction for your actual expenses.

Qualified business use of a portion of the home

Q8. What is a qualified business use of a portion of the home for purposes of the simplified method?

A. A qualified business use of a portion of the home generally means:

1. Exclusive and regular use as the main place in which you conduct your business, or meet with customers, clients or patients;
2. Regular use as a storage area for products you sell in your business, or samples, if your home is the only place you conduct your business; and/or
3. Regular use in providing daycare services for children, the elderly, or disabled persons.

If you are an employee, use of a portion of the home as the main place in which you conduct your business, or meet with customers, clients or patients, must be for the convenience of your employer.

More than one qualified business use of the home

Q9. If you have more than one qualified business use of the same home for a taxable year, do you have to use the same method for each qualified business use?

A. Yes. You must use the same method for all qualified business uses of the same home for a particular taxable year. However, if you have a qualified business use of your home and a rental use of the same home, you cannot use the simplified method for the rental use.

Q10. Can two or more persons sharing a home each use the simplified method?

A. Yes. You and someone else can share a home and each use the simplified method, but not for use of the same portion of the home. For example, you and your spouse, if otherwise eligible and regardless of filing status, may each use the simplified method for a qualified business use of the same home for up to 300 square feet of different portions of the home.

Determination of deductible expenses and allowable square footage

Q11. How is the amount of deductible expenses determined under the simplified method?

A. You determine the amount of deductible expenses by multiplying the allowable square footage by the prescribed rate. The allowable square footage is the smaller of the portion of a home used in a qualified business use of the home, or 300 square feet. The prescribed rate is $5.00. However, if the qualified business use is providing daycare services, see the next FAQ.

Q12. If the qualified business use is providing daycare services, how is the amount of deductible expenses determined under the simplified method?

A. You determine the amount of deductible expenses by multiplying the allowable square footage by the prescribed rate. For this purpose, the prescribed rate is $5.00 multiplied by a fraction, the numerator of which is the number of hours you provide daycare services during the taxable year, and the denominator is the total number of hours during the taxable year.

Q13. How is the allowable square footage determined under the simplified method when 1) the qualified business use of the home is for less than the entire taxable year, or 2) the portion of the home used in a qualified business use changes during the taxable year?

A. You must determine the average of the monthly allowable square footage for the taxable year. For this purpose, no more than 300 square feet may be taken into account for any one month, and you only account for a month in which you had 15 or more days of a qualified business use of your home.

For example, you begin using 400 square feet of your home for a qualified business use on July 20, and continue that use until the end of the taxable year. You have an average monthly allowable square footage of 125 square feet (300 square feet for each month August through December divided by the number of months in the taxable year ((300 + 300 + 300 + 300 + 300)/12)).

Q14. What additional rules apply if you use the simplified method and have more than one qualified business use of the same home for a taxable year?

A. Your allowable square footage for all of the qualified business uses is limited to 300 square feet. You must allocate the square footage among the qualified business uses using any reasonable method, but you may not allocate more square footage to a qualified business use than you actually use in that qualified business use.

Gross income limitation on the amount of deductions

Q15. Is there a gross income limitation to the amount deductible under the simplified method?

A. Yes. The amount of the deduction computed using the simplified method cannot exceed the gross income derived from the qualified business use of the home for the taxable year, reduced by the business deductions that are unrelated to the qualified business use of the home.

Q16. If the amount deductible under the simplified method is reduced due to the gross income limitation, can the amount that was not allowed be carried over and deducted in a subsequent taxable year?

A. No. Any amount in excess of the gross income limitation may not be carried over and claimed as a deduction in any other taxable year.

Q17. Can an amount carried over from a prior taxable year in which the standard method was used be deducted in a taxable year in which the simplified method is used?

A. No. An amount that was disallowed due to the gross income limitation under the standard method in a prior taxable year may only be carried over and deducted in succeeding taxable years in which the standard method is used.

Deducting actual expenses of your home

Q18. How are expenses of the home relating to the portion of your home used for a qualified business use deducted for a taxable year in which the simplified method is used?

A. If you itemize deductions and use the simplified method for a taxable year, you can deduct expenses for the home that are otherwise deductible (for example, mortgage interest and property taxes) as itemized deductions on Form 1040 or 1040-SR, Schedule A, without reducing these expenses by the amounts allocable to the portion of the home used in a qualified business use. You do not deduct any portion of these expenses from the gross income derived from the qualified business use of the home.

Depreciation

Q19. Can depreciation for the portion of the home used in a qualified business use be deducted for a taxable year in which the simplified method is used?

A. No. You cannot use the simplified method and deduct any depreciation (including any additional first-year depreciation) or IRC § 179 expense for the portion of the home used in a qualified business use for the same taxable year.  However, you can deduct depreciation for depreciable business assets (for example, furniture and equipment) other than the portion of the home used in the qualified business.

Q20. What effect does using the simplified method have on the requirement to recapture depreciation when the home is subsequently sold at a gain?

A. For taxable years in which the simplified method is used, the depreciation deduction allowable for the portion of the home used in a qualified business use is deemed to be zero. Accordingly, you do not have to recapture any depreciation for taxable years in which you used the simplified method. However, you may have to recapture depreciation for taxable years in which you used the standard method.

Q21. How is the depreciation deduction calculated under the standard method for a taxable year following a year in which the simplified method is used?

A. If you use the simplified method for one taxable year and use the standard method for any subsequent year, you must calculate the depreciation deduction for the subsequent year using the appropriate optional depreciation table, even if you did not use the tables for the first year the property was used in business. The optional depreciation tables for MACRS property are provided in the annual IRS Publication 946, How To Depreciate Property.

You figure the depreciation deduction for a subsequent year in which you use the standard method by determining the remaining adjusted depreciable basis allocable to the portion of the home used in a qualified business use, and then multiplying that basis by the annual depreciation rate for the applicable year specified in the appropriate optional depreciation table. For this purpose, the applicable year is the year that corresponds with the current taxable year based on the placed-in-service year of the property.