What Is Rev Proc 2014 17 for the Home Office Deduction?

The Internal Revenue Service (IRS) provides an optional safe harbor method for the home office deduction, often called the simplified option. This method was introduced to reduce the record-keeping and calculation burdens for taxpayers. Instead of tracking actual expenses, taxpayers can use a standard rate prescribed by the IRS, which can be elected on a year-by-year basis.

Eligibility for the Simplified Method

To qualify for the simplified home office deduction, a taxpayer must satisfy two tests. The first is the “regular and exclusive use” test, which requires a specific area of the home to be used exclusively for business on an ongoing basis. Incidental business use is not sufficient, and if the area is also used for personal purposes, it fails the exclusive use requirement.

The second requirement is the “principal place of business” test. The home office must be the primary location where the taxpayer conducts business. This can be where administrative or management activities are performed, provided there is no other fixed location for these substantial activities. A separate, unattached structure, like a studio or garage, must also meet the exclusive use test.

This method is primarily for self-employed individuals, including sole proprietors who file Schedule C and farmers who file Schedule F. Partners may also be eligible to claim the deduction for unreimbursed business expenses. Due to tax law changes effective through 2025, employees are generally ineligible to claim the home office deduction.

Calculating the Deduction

The calculation for the simplified method is direct. The deduction is determined by multiplying the square footage of the business area by a standard IRS rate. For recent tax years, this rate has been $5 per square foot, with a maximum allowable area of 300 square feet. This results in a maximum possible deduction of $1,500 per year.

The standard rate is designed to be inclusive, covering a range of expenses that would otherwise need to be tracked and allocated. These bundled costs include:

• Utilities such as electricity and gas
• Homeowners’ or renters’ insurance
• Home maintenance and repairs
• A depreciation allowance for the business portion of the home

Certain home-related expenses are not factored into the simplified rate. Taxpayers can still deduct qualified mortgage interest and real estate taxes as itemized deductions on Schedule A. Other business expenses not related to the home, such as advertising and supplies, remain fully deductible on the appropriate business schedule.

Limitations and Special Rules

Choosing the simplified method carries specific consequences that taxpayers must consider. A primary limitation is that a taxpayer cannot claim a separate depreciation deduction for the home, as a depreciation allowance is already factored into the standard rate. This can be advantageous when the home is sold, as there may be less depreciation to recapture as gain.

Another rule involves the gross income limitation. The home office deduction cannot exceed the gross income from the business activity, less other business expenses. Under the simplified method, any excess deduction amount cannot be carried over to a future tax year. Any unused deduction from a prior year when the actual expense method was used cannot be claimed in a year the simplified method is chosen.

If the qualifying business use of the home did not occur for the entire year, the deduction must be prorated. The taxpayer can only calculate the deduction for the months the home office was in use for at least 15 days. This may require averaging the square footage used during the year if it changed.

How to Claim the Deduction

Taxpayers calculate their deduction using the simplified method worksheet found in the instructions for their business tax form, such as Schedule C. The result is entered on the designated line for expenses for business use of the home. A key difference from the actual expense method is that Form 8829 is not filed when using the simplified option.