Contributed by: PhillipB, FreeTaxUSA Agent, Tax Pro
With the prevalence of side hustles in the gig economy, there’s a strong chance you may need to file multiple schedule Cs for different businesses. There’s also a good chance you may have one home office for all those businesses. If this is your situation, how do you report your home office deduction for each business on your return?
Allowable methods to deduct the same home office with multiple businesses
Here are the methods the IRS allows you to use for this situation:
- Under the actual expense method, you would need to figure out the percentage of time that the office space was used for each business. Then the usage percentage of each is applied to every home office expense in each separate business. NOTE: Currently, our software doesn’t support reporting the home office expense for multiple businesses using the actual expense method.
- Under the simplified method, you are allowed a deduction of $5 per square foot with a limit of 300 square feet. You would calculate a business use percentage for each business as explained above, and then you would apply each business’s use percentage to the total office square footage. If the office square footage is more than 300 square feet, you would apply each business’s use percentage to the 300 square foot limit. This method is fully supported in FreeTaxUSA.
How do I calculate the business usage for each business?
The generally accepted method for allocating the business use of the office between multiple businesses is to track your time in the home office for each business. The business use percentage for each business would be calculated by dividing the fraction:
- Business hours of office use for each business / Total business hours of office use for all businesses.
This method would require that you keep accurate records of the time you worked in the home office throughout the year.
If you didn’t keep accurate records of the time you worked in the home office, you could consider another reasonable method instead. However, in subsequent years we recommend you track time spent in the home office for each of your businesses. One example of another reasonable method instead of using time in the equation is using the following fraction:
- Gross income for each business / Total gross income of all businesses
IRS Publication 587 (search for “More than one qualified business”) only stipulates that a reasonable method is used to allocate the home office space if you are using the simplified method to deduct the home office expense.
Reasons to use the simplified method instead of the actual expense method
While the actual expense method usually gives the highest deduction, there are some good reasons to consider the simplified method instead.
- You do not track any depreciation on your home with the simplified method. Most primary residence sales qualify to take a $500,000 capital gain exclusion ($250,000 for unmarried taxpayers). If there has ever been any depreciation deducted on a primary residence, the portion of the gain equal to previously deducted depreciation is taxable despite the $500,000 (or $250,000) primary home sale exclusion.
- You will not need to track your household expenses and maintain receipts, mortgage statements, property tax records, or utility bills if you use the simplified method.
- There may be a significantly lower risk of your return being examined. Standardized deduction methods like standard vehicle mileage rates, and the simplified home office deduction usually develop out of deductions that have been audited heavily and that have frequently carried IRS corrections to audited returns. Using the standardized method eliminates a portion of the risk of having the IRS correct your return in an audit.
- The only documentation needed with the simplified method for the home office deduction is proof the home office was used as an office (pictures and measurements of the space each year may be sufficient) and that the office was used exclusively and regularly for business (maintaining time records of time spent in the office can cover this requirement).
Example of how to calculate and enter the simplified method
James is an independent website developer, and he owns a property management company. He has a 3,000 square foot home and a 350 square foot home office. He didn’t track his time worked in the home office for the year, but his gross income for web design was $100,000 and for his property management business was $30,000.
He will follow these steps to report the simplified method home office expense.
- Using a calculator, he determines the home office business use percentage by dividing gross income of each business / $130,000 total gross income. The result is 76.92% for the web design business, and 23.08% for the property management business.
- Since his home office space is more than allowable 300 square foot limitation, he will apply the use percentages for each business against 300 square feet instead of the full 350 square feet. The square footage allocation would be 76.92% * 300 = 231 square feet for the web design business and 23.08% * 300 = 69 square feet for the property management business.
- Follow this menu path: Income > Business Income > Business Income (Schedule C)
- Select edit next to either business.
- When you reach the Your Business screen, select edit next to Home Office Expenses.
- Select +Add a Home Office, or select edit next to an already entered home office
- On the screen labeled Tell us about your home office, check the yes box on the question “Would you like to use the simplified method to report home business expenses?” and make sure the correct percentage of your home office space is entered on the line labeled “Square Feet of Area Used for Business”. Select Save and Continue.
