Use Net Square Footage to Increase Home-Office Deductions

Have you ever wondered why it’s called the practice of accounting?  Like the practice of medicine, it’s never perfect.

What can happen under generally accepted accounting principles varies widely.  For example, one airline may depreciate an airplane over 7 years, while another airline depreciates the identical aircraft over 17 years.  Both approaches may meet generally accepted accounting principles, although they produce far different earnings-per-share numbers.

Cost accounting, too, contains variations.  Public Law 100-679 requires educational institutions to complete a Cost Accounting Standards Board disclosure statement for government grants.  In the disclosure statement, the educational institution explains its methodology for allocating indirect costs when seeking reimbursement under government grants.

For example, the University of Delaware allocates its operations and maintenance pool costs on the net-square-footage basis.  The expenses in this pool include the following:

• Building services
• Repairs and maintenance
• Utilities
• Heating and cooling plants and functions
• Grounds upkeep and services
• Janitorial services

The University of New Hampshire also uses net square footage to allocate its facility service costs.  The university defines net square footage as gross square footage minus common areas such as

• halls,
• bathrooms,
• stairways,
• and foyers.

When you decide what percentage of your home is devoted to the home office, do you use gross square footage or net square footage?  In its (“I’m here to help you”) publication on the home office, the IRA says this:

To find the business percentage, compare the size of the part of your home that you use for business to your whole house.  Use the resulting percentage to figure the business part of the expenses for operating your entire home.

The publication further states that you can use any reasonable method to determine your business percentage, including the method just described, the “number of rooms” method, or any other reasonable method.  Under the number of rooms method, if all the rooms in your home are about the same size, the IRS says you can divide the number of rooms used for business by the total number of rooms in your home to find your business percentage.  If you use the number of rooms, you exclude hallways, bathrooms, stairways, and foyers, just as the University of New Hampshire excludes them when asking the government for grant reimbursements.

The number-of-rooms method will probably give you the most bang for your buck.  Unfortunately, it has two problems.  Problem #1: When you complete IRA Form 8829, the home-office deduction form, line 2 asks for the “total area of your home.”  That’s not compatible with the number of rooms, and probably scares people away from using the number-of-rooms method.

Further, the instructions for Form 8829

·        never mention the number-of-rooms method, and

·        simply state that you may use “square feet or any other reasonable method.”

The form gives you no place to disclose that you are using the number-of-rooms method or any other method.

Problem #2: If your home is like most homes, your rooms are not approximately the same size; therefore, logic tells you simply to take a pass on the number of rooms method.

This brings us to the net-square-footage method, our method of choice for avoiding the problems you encounter in the number-of-rooms method, while still keeping its bang.  First, this method is compatible with the tax form where you enter the total area of your home, because the form is looking for square feet.  You enter net square footage on this line ( the appropriate measure of the usable square footage of your home).

Let’s do this using the example in Exhibit 1 below.  Say you measure the outside dimensions of your home and that measure produces 3,500 square feet.  Say further that the inside dimensions of your office measure 280 square feet, making your office 8% of the whole house.  That’s what you claim if you simply read the IRS instructions and do not pay attention to your taxes.

Now let’s remake that space using the net-square-footage method.  Here you subtract from the gross square footage the footage consumed by

·        outside walls,

·        hallways,

·        bathrooms,

·        stairways,

·        foyers,

·        water heaters,

·        crawl spaces, and

·        the heating and cooling plant.

The result will be your net usable square feet.

Say your measure produces 2,500 net square feet.  Divide the 280 square feet of office space by the 2,500 net square feet and you have an office equal to 11.2% of your home.

Congratulations!  You’ve just won yourself a 40% increase in deductions, just for knowing what you’re doing.  That means you now deduct 40% more of your

·        mortgage interest (which reduces your self-employment and phaseout taxes),

·        property taxes (which also reduces your self-employment and phaseout taxes),

·        utilities,

·        insurance,

·        rent (if you are renting your home),

·        pest control,

·        maintenance and repairs (those benefiting the entire house),

·        lawn care (the courts allow this, the IRS does not, you should take it), and

·        depreciation.

If you claim a deduction for an office in your home and you would like to increase the size of that deduction, you need to seriously consider the net-square-footage method.  It approximates the number-of-rooms method championed by the IRS, but it overcomes the impediments.

Information provided by Tax Reduction Letter, December 2005, Volume 14, Number 12