HOME OFFICE DEDUCTION

STATUS

Representatives Kurt Schrader (D-OR), has introduced H.R. 1827, the Home Office Deduction Simplification Act.

. BACKGROUND

 In 1976, Congress enacted Section 280A of the Internal Revenue Code, which as amended in 1997, provides the limited circumstances in which an individual or an S corporation may take a deduction for expenses related to an office in the home.  Generally, deductions are limited to those parts of a home that are exclusively used on a regular basis as a principal place of business or to meet with patients, clients, or customers.

 It is not a simple process to calculate the deduction.  The following is an IRS worksheet:

PART 1—Part of Your Home Used for Business:

 

 

1)

Area of home used for business

1)

 

 

2)

Total area of home

2)

 

 

3)

Percentage of home used for business (divide line 1 by line 2 and show result as percentage)

3)

 

%

PART 2—Figure Your Allowable Deduction

 

 

 

4)

Gross income from business (see instructions)

4)

 

 

 

 

 

(a)
Direct Expenses

 

(b)
Indirect Expenses

 

 

 

5)

Casualty losses

5)

 

 

 

 

 

 

6)

Deductible mortgage interest and qualified mortgage insurance premiums

6)

 

 

 

 

 

 

7)

Real estate taxes

7)

 

 

 

 

 

 

8)

Total of lines 5 through 7

8)

 

 

 

 

 

 

9)

Multiply line 8, column (b), by line 3

9)

 

 

 

 

10)

Add line 8, column (a), and line 9

10)

 

 

 

 

11)

Business expenses not from business use of home (see instructions)

11)

 

 

 

 

12)

Add lines 10 and 11

12)

 

 

13)

Deduction limit. Subtract line 12 from line 4

13)

 

 

14)

Excess mortgage interest and qualified mortgage insurance premiums

14)

 

 

 

 

 

 

15)

Insurance

15)

 

 

 

 

 

 

16)

Rent

16)

 

 

 

 

 

 

17)

Repairs and maintenance

17)

 

 

 

 

 

 

18)

Utilities

18)

 

 

 

 

 

 

19)

Other expenses

19)

 

 

 

 

 

 

20)

Add lines 14 through 19

20)

 

 

 

 

 

 

21)

Multiply line 20, column (b) by line 3

21)

 

 

 

 

22)

Carryover of operating expenses from prior year (see instructions)

22)

 

 

 

 

23)

Add line 20, column (a), line 21, and line 22

23)

 

 

24)

Allowable operating expenses. Enter the smaller of line 13 or line 23

24)

 

 

25)

Limit on excess casualty losses and depreciation. Subtract line 24 from line 13

25)

 

 

26)

Excess casualty losses (see instructions)

26)

 

 

 

 

27)

Depreciation of your home from line 39 below

27)

 

 

 

 

28)

Carryover of excess casualty losses and depreciation from prior year (see instructions)

28)

 

 

 

 

29)

Add lines 26 through 28

29)

 

 

30)

Allowable excess casualty losses and depreciation. Enter the smaller of line 25 or line 29

30)

 

 

31)

Add lines 10, 24, and 30

31)

 

 

32)

Casualty losses included on lines 10 and 30 (see instructions)

32)

 

 

33)

Allowable expenses for business use of your home. (Subtract line 32 from line 31.) See instructions for where to enter on your return

33)

 

 

PART 3—Depreciation of Your Home

 

34)

Smaller of adjusted basis or fair market value of home (see instructions)

34)

 

 

35)

Basis of land

35)

 

 

36)

Basis of building (subtract line 35 from line 34)

36)

 

 

37)

Business basis of building (multiply line 36 by line 3)

37)

 

 

38)

Depreciation percentage (from applicable table or method)

38)

 

%

39)

Depreciation allowable (multiply line 37 by line 38)

39)

 

 

PART 4—Carryover of Unallowed Expenses to Next Year

 

40)

Operating expenses. Subtract line 24 from line 23. If less than zero, enter -0-

40)

 

 

41)

Excess casualty losses and depreciation. Subtract line 30 from line 29. If less than zero, enter -0-

41)

 

 

 LEGISLATION

 The legislation would allow otherwise qualified taxpayers to use a standard home office deduction of $1,500 rather than go through the calculations.

 OUTLOOK

 As with all things tax relief, the problem is the pay-go rule that requires revenue offsets.

 

 

 

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