Partial-Year Home Offices
Most people do not start up a new business precisely on January
1. Most likely, your first year in the home office was not a complete
one. Similarly, people who close down their business don't always
do it precisely on the last day of their tax year.
Regular
Method
For the first year in which you began using your home
office, or for the year in which you closed your business, you'll
have to prorate your home office expenses based on the percentage
of the time your home office was actually used.
For example,
if you began using your home office on July 1 of this year and continued
to use it through the end of the year, you can use only your expenses
for the last half of the year in computing your home office deduction.
Special
rules for depreciation. For the first year you begin using
your home office, the IRS provides a table showing the fraction of
your depreciable basis you can deduct, based on the month in which
you started using the office. This table is available in IRS Publication
587, Business Use of Your Home (Including Use by Daycare Providers).
For
the last year, you'll need to determine the amount of depreciation
you'd normally deduct for the year, under the usual
rules. Then multiply this amount by a fraction, of which the
numerator will be the number of months that you used the office, and
the denominator will be 12. Count the month in which you stopped
using the property as half a month. For example, if you stopped using
your office in October, the fraction will be 9.5/12.
Special
rules for home day care operators. The IRS provides a special
tax break for home day care operators, who can count as "business
use space" whatever portion of the home is regularly used for day
care purposes, even if the same space is also used for personal living
purposes. However, they must prorate their home office expenses based
on their hours of operation.
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Example A home day care operator's expenses
for mortgage interest, real estate taxes, depreciation, utilities,
and property insurance amounts to $10,000. She estimates that 80%
of her home is used regularly for day care activities. The day care
center is open 12 hours per day, five days per week, which amounts
to 60 hours out of 168. She must multiply her home office
expenses of $10,000 by .80 to arrive at her business use percentage
of $8,000, and then multiply this amount by 60/168 to arrive at her
allowable deduction of $2,857. |
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Simplified Method
Under the simplified method,
if you don’t use your home for business for twelve full months,
you will have to prorate your square footage, which will reduce your
maximum deduction. In order to count as a month of use, you must use
your home office for at least 15 days out of each month.
On June 19, 2014, Anne begins using 100 square
feet of her home for her consulting business. She continues to use
her home office for the remainder of the year. If she uses the simplified
method to determine her deduction, she cannot simply multiply 100
times $5. Instead, she must prorate the square footage as follows:
-
She used the space for six months. (June does not count
because she did not meet the 15-day requirement)
-
She multiples the square footage (100 sq. ft) by the month
used (6) and divides by 12, resulting in a prorated square footage
of 50 square feet.
The prorated square footage (50) is multiplied by the prescribed
rate ($5) to arrive at a maximum deduction of $250 for 2014.
Anne would be wise to explore the regular method to see if
it provides her with a higher deduction.
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