How to Calculate the Home Office Deduction


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One of the attendees at last Sunday’s webinar asked, “If your home office is in garage, how do you calculate sq footage since home sq footage never includes garage?”

The short answer is, of course, never say never. Total square footage of a property can include the garage for purposes of the home office calculation.

Let’s take a step back, though, and see how the home office deduction works.

For 2013, you will get a choice in how the deduction is taken. This is the return that is filed in 2014.

But, in both cases, the home office deduction must be for a space that is regularly and exclusively used for a business. It can’t be a corner of the dining room table or a space in the family room. It has to be exclusively used.

The ‘normal’ way of taking the home office deduction is to calculate the business square footage. So, let’s say you use a 2nd bedroom that is 200 square feet. That’s your business use amount. Now calculate the total square footage of your home. This is what the member was referring to. What if, instead of a bedroom, the home office was in the garage. Well, for one thing, the space would be bigger. Let’s just assume 500 square feet to keep the calculation easy. In both cases, let’s say the house is 2000 square feet.

In the first case, the 2nd bedroom conversion would be 200/2000 or 10%. In the case of the garage conversion, it would be 500/(2000+500) or 20%.

The business use percentage is then applied again indirect costs such as mortgage interest or rent, HOA dues, insurance, property tax, janitorial, utilities and the like. Your home office deduction can not take your business to a loss if you’re filing as a Schedule C Sole Proprietorship. If you’ve got unused home office deduction, it can carry forward to future years.

The new option is that you can instead take a deduction for $3/square foot, up to a total of $1,500. If you have unused home office deduction, you cannot carry it forward. There are two reasons why I’m not a fan of this new variation on the home office deduction. First, your deduction is limited to just $1,500. Second, if you have unused home office deduction, you lose it. It is, however, simpler and you don’t need to track your indirect expenses. In fact, you don’t need to reduce your mortgage interest or property tax deduction on Schedule A (itemized deductions).

I want to go back to the original question for a second, though. The answers you get are directly related to the questions you ask. If you ask a question that starts off with an absolute negative (because you ‘never can’ or because you ‘can’t do’), you’re going to limit your answer. In fact, there is no way to answer the question as originally stated other than to say, “Oh, you’re right, you can’t.” If your goal is to actually learn HOW to do something, then a power question will be a great tool.

A power question inspires creative response. It doesn’t ask a task oriented question (How do I elect S Corp status?) but instead asks something that allows the expert to brainstorm and expound. That’s where the gold is!

I would change the question to something like, ‘My office is in a converted garage. What are some ways to take advantage of all the possible tax strategies for my situation?”

To find out more about the “2014 Tax Changes You Need to Know”, please visit http://www.USTaxAid.com/insiders-only


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