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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.

Example

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.

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.

Example

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:

Anne would be wise to explore the regular method to see if it provides her with a higher deduction.

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