Simplified Method
Under the new, simplified method:
- You still have to calculate the square footage of the business use space.
- The business use cannot exceed 300 square feet for purposes of the deduction, regardless if your business use space is larger.
- The standard deduction allowed is $5 per square foot up to a maximum of $1,500. If that amount exceeds the income from the business activity, it will be disallowed, and you will not be able to carry it forward, as with the actual expense method.
The good news is that you will not have any potential depreciation recapture on the sale of the house. But even the simple method isnÂ’t so simple. If you donÂ’t use the dwelling for the entire year, you must prorate the square footage by an average monthly balance over the year. For example, you begin using 400 square feet of your home for business on July 20 and use it throughout the balance of the year. The average monthly allowable square footage would be 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)).
You may choose to use either method for any taxable year and do it simply by using that method in your timely filed, original federal income tax return for that taxable year. Once you do chose a method for a taxable year, you cannot later change to the other method for that taxable year.
If you do use the simplified method for one year and the regular method for any subsequent year, you must calculate the depreciation for the subsequent year using the appropriate optional depreciation table. Any depreciation you took prior to your switching to the simplified method is still subject to recapture upon the sale of the house.
Despite the easier record keeping, you may want to calculate it both ways to determine which method brings you the best deduction. But I am happy to see Treasury and the IRS finally giving small businesses another, easier option. Here is a comparison chart of the two methods that the IRS has published on its Website. See for yourself what works better for your small business.
Comparison of Methods
Simplified Option |
Regular Method |
Deduction for home office use of a portion of a residence allowed only if that portion is exclusively used on a regular basis for business purposes | Same |
Allowable square footage of home use for business (not to exceed 300 square feet) | Percentage of home used for business |
Standard $5 per square foot used to determine home business deduction | Actual expenses determined and records maintained |
Home-related itemized deductions claimed in full on Schedule A | Home-related itemized deductions apportioned between Schedule A and business schedule (Sch. C or Sch. F) |
No depreciation deduction | Depreciation deduction for portion of home used for business |
No recapture of depreciation upon sale of home | Recapture of depreciation on gain upon sale of home |
Deduction cannot exceed gross income from business use of home less business expenses | Same |
Amount in excess of gross income limitation may not be carried over | Amount in excess of gross income limitation may be carried over |
Loss carryover from use of regular method in prior year may not be claimed | Loss carryover from use of regular method in prior year may be claimed if gross income test is met in current year |
Source: www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Simplified-Option-for-Home-Office -Deduction