The Home Office Deduction

Overview

Many self-employed farmers (as well as other self-employed persons) have an office in their home.  If strict rules are satisfied some generous above-the-line business expense deductions can be claimed.  But, to claim the expenses the 43-line Form 8829 with complex calculations must be completed and filed unless an optional safe harbor is utilized.  A farmer claims the deductions attributable to the home office on Schedule F of Form 1040.  IRS Pub. 587 provides helpful worksheets when computing the deduction.  

Business Use of the Home

Taxpayers with an office in the residence that is maintained regularly and exclusively for business purposes may deduct the costs associated with that office on IRS Form 8829. The office must be the principal place of business for the taxpayer (the most important or significant place for the business) or it must be a place of business used by clients or customers in the normal course of the taxpayer's trade or business.  What does that mean?  It means that the home office must be used exclusively and on a regular basis for business purposes – with limited exceptions for day care providers and inventory storage.  In addition, the home office is the “principal place of business” if it is used for administrative or management activities of the business or it is the most important place where the business is conducted.  Also, an important point for many farming business is that the “home” office can be located in a separate unattached structure on the same property as the home.  So, an office in a workshop or unattached garage or similar structure still can generate deductions.

Deductible Expenses

So, what above-the-line deductions can be claimed?  The deductible expenses are the “direct expenses” of the home office.  Direct expenses include, for example, the costs of painting or repairing the home office, as well as depreciation deductions for depreciable items that are used in the home office.  Indirect expenses include expenses associated with maintaining the home office.  These expenses include the properly allocable share of utility costs, depreciation, insurance, mortgage interest, and real estate taxes.  In addition, if the home office is the “principal place of business,” computers and related equipment used in the home office are not subject to the “listed property” limitations. 

Deduction Limitations

In Part II of Form 8829, the overall amount of the deductions associated with the home office is limited by the income attributable to the use of the home office.  But, any home office expenses that can't be deducted due to a limitation may be carried over and deducted in later years.

Optional Safe Harbor

Beginning in 2013, an optional safe harbor can be used to calculate the amount of the deduction for expenses associated with the business use of a residence.  Rev. Proc. 2013-13.  Individual taxpayers who elect this method can deduct an amount determined by multiplying the allowable square footage by $5. The allowable square footage is the portion of the house used in a qualified business use, but not to exceed 300 square feet.  Thus, the maximum a taxpayer can deduct annually under the safe harbor is $1,500.  In addition, the deduction cannot exceed the amount of gross income derived from the qualified business use of the home (less deductions).  It is not possible to carry over any excess to another tax year. The election is made on a timely-filed original tax return, and taxpayers are allowed to change their treatment from year-to-year. However, the election made for any tax year is irrevocable.

The sale-harbor is only available if all of the other requirements for a home-office deduction are satisfied.  Thus, the office in the home must be used exclusively for business purposes.  In addition, the safe harbor is not really an election.  The taxpayer simply chooses to use it at the time the return is filed, on a year-by-year basis.

Conclusion

Many farmers will be able to utilize the office in the home deduction.  The IRS has provided a simplified method safe harbor in recent years.  But, the safe harbor approach may not maximize the deduction.  The approach that provides the best result depends on the situation and the taxpayer’s unique set of facts.