While the TCJA suspended the miscellaneous itemized expense deduction through 2025, and thus the ability of employees to deduct home office expenses, the home office deduction is still available for Schedule C taxpayers. And, if those taxpayers have been using the simplified method of calculating their home office deduction, the actual-expense method may be worth a second look in light of the SALT and mortgage interest limitations enacted under the TCJA. Under the simplified method of calculating a home office deduction, the number of square feet in the home office, up to a maximum of 300 square feet, is multiplied by $5, thus allowing a maximum home office deduction of $1,500. It’s simple because taxpayers don’t have to document their actual expenses or the allocation factor used.
However, although the actual-expense method requires additional work, it may yield a larger home office deduction. Under the actual-expense method, a portion of the taxpayer’s mortgage interest and SALT expenses, which may be limited as a result of TCJA changes if reported on Schedule A, Itemized Deductions, are reported as above-the-line expenses on Schedule C. Thus, nondeductible Schedule A expenses can be transformed into deductible Schedule C expenses. Additionally, expenses that would not otherwise be deductible, such as utilities, insurance, security, and repairs, are converted into deductible expenses. One thing to remember, however, is that depreciation also needs to be calculated under the actual-expense method and, when a home is later sold, that depreciation will be recaptured as ordinary income. Finally, deductible home office expenses cannot exceed income from the taxpayer’s Schedule C business.
Contact Fred Day at 901-800-8357 if you have questions how this applies to you.