Tax Planning

Tax-Saving Tip: Use Net Square Footage to Increase Home-Office Deductions

Sep 1, 2021

Bradford Tax Institute

In its “I’m here to help you” publication on the home office, the IRS says, “You can use any reasonable method to determine the business percentage” of your home that you use for business.1

The publication then lists two commonly used reasonable methods:

  1. Gross square footage. Divide the area (the length multiplied by the width) used for business by the total area of your home.
  2. Number of rooms. If the rooms in your home are all about the same size, you can divide the number of rooms used for business by the total number of rooms in your home.

In your calculations, you should probably consider a third reasonable method, commonly known as the net-square footage method. But first, let’s examine the IRS home-office form where you claim the tax deduction.

 

IRS Form 8829

IRS Form 8829 shows only the gross-square-footage method as an option, as you can see below.2 This conflicts with the IRS instructions and its publication.

Page 2 of the IRS instructions for completing Form 8829 tells you that “you can use square feet or any other reasonable method if it accurately figures your business percentage.”

You find the net-square-footage method in cost accounting, and it’s certainly another reasonable method. Under this method, you subtract from the gross square footage the footage consumed by:

  • outside walls,
  • hallways,
  • bathrooms,
  • stairways,
  • foyers,
  • water heaters, and
  • heating and cooling equipment.

The result is your net usable square feet. This method reduces the denominator in your calculations and increases the business percentage, giving you a bigger tax deduction for the home office.

Defense and other government contractors, as well as educational institutions, commonly use the net-square footage method in allocating costs according to the cost accounting standards promulgated by the Cost Accounting Standards Board.3 In commercial real estate, you often find the term “net square footage” referred to instead as “usable square footage.”4

 

Easy Calculation

Rather than try to exclude areas such as hallways and bathrooms, which can be difficult to measure, simply take the square footage from each of the rooms in the home and total it. This gives you the total net usable square footage. Use this as the denominator.

You can think of net square footage as a sophisticated number-of-rooms method.

 

Working Example

Let’s compare the three methods on this example home, which has four bedrooms, three bathrooms, a kitchen, a dining room, a living room, and a family room (eight rooms—you exclude the bathrooms).

The outside dimensions of this home measure 2,600 square feet. When you exclude the common areas, you find 2,000 net square feet. Your office occupies a room that measures 270 square feet.

Here’s a comparison of the three methods:

Method            Numerator Denominator Percentage

If you just picked up IRS Form 8829 and simply made the computations using the form for the above home, you would have a 10.38 percent deduction.

Using the alternative number-of-rooms method, you end up with a 20 percent greater home-office deduction.

But the net-square-footage method beats both other methods in this example. Compared with the gross-square footage method, the net-square-footage method produces a 30 percent increase in the home-office deduction.

The increase means you now deduct 30 percent more of your:

  1. mortgage interest (which, on a Schedule C, reduces your self-employment taxes);
  2. property taxes (which also reduces self-employment taxes on a Schedule C);
  3. utilities;
  4. insurance;
  5. rent (if you are renting your home);
  6. pest control;
  7. maintenance and repairs (those benefiting the entire house); and
  8. depreciation

If you operate your business as a corporation and your corporation reimburses you for the home-office deduction, the corporation gets a 30 percent increase in its deductions.

 

Takeaways

IRS Form 8829 and its instructions lead you to the gross-square-footage method that gives you a lesser deduction for your home office. To increase the size of that deduction, you need to seriously consider both the number-of rooms and the net-square-footage methods.

The net-square-footage method is an exact method, and it always beats the gross-square-footage method. It’s better than the number-of-rooms method because it produces a more audit-proof exact result.

Your mission is straightforward: Make sure that you get the maximum deduction and that it’s totally defensible. Do the little arithmetic that it takes to produce the maximum deduction.

 

1 IRS Pub. 587, Business Use of Your Home (2015), dated Jan. 28, 2016, P. 10.
2 IRS Form 8829, Expenses for Business Use of Your Home (2015).
3 See, for example, the cost disclosure document from the University of Delaware, section 3.4.0.A, and NCES, “Net Assignable Area,” at 3.2.2, for how the standards apply to educational institutions.
4 See Arlington Chamber of Commerce blog, “Rentable vs. Usable Square Feet.”

Related Newsletter: 14 Tax Reduction Strategies for the Self-Employed

 

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