7-2 Final Project Milestone Three. Home Office Deductions

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1 7-2 Final Project Milestone Three: Home Office Deductions Valerie Smith SNHU TAX-670-X1459 Tax Research Methodology 23TW1 Joseph R Palombo November 2, 2023

2 7-2 Final Project Milestone Three: Home Office Deductions Memorandum TO: Client, Nora FROM: Valerie Smith DATE: November 2, 2023 RE: Home Office Deductions Facts: Client, Nora has a C-C Bakery and she requests advice concerning home office deductions. In Nora’s 2,000-square-foot home, there is a 300-square-foot room that she has set for administrative tasks (ordering supplies and paying bills) for her C-C Bakery business. She learned about small businesses like hers benefiting from home office deductions and wants to know if she can take them for her home office. Issue(s): Can Nora take and utilize home office deductions for her C-C Bakery business’s home office? Conclusion: Nora, being a homeowner, qualifies for home office deductions and can take them for her business. This is because her small C-C Bakery business uses her home’s 300-square-foot room for administrative activities. Nora should consider the standard procedure when taking the deductions since it seems the most beneficial and advantageous. The simplified approach will restrict her to a $1,500 home office deduction while the regular method allows deductions of higher or several expenditures provided that the expenses are connected. However, there is an

3 assumption that Nora’s expenses are direct or indirect. Based on her circumstances, the regular method is the best choice. Authorities: IRS Publication 334 – explores federal tax laws applicable to small business owners (sole proprietors) and statutory employees. IRS Publication 587 – provides details on acquiring deductions if a business utilizes own home. IRC § 280A – discusses expenses’ disallowance associated with the rental of vacation homes and business utilization of homes. Analysis and Summary: According to IRC § 280A and IRS Publication 587, a home office should be used for only administrative activities for the business on a regular basis for it to qualify the home office deductions. Taxpayers with home offices that are not used regularly or exclusively for business operations are restricted from taking home office deductions (Sawyers, R. B., & Gill, 2020). Nora's home office meets these requirements and is eligible for the deduction because she uses the room regularly for exclusively business tasks. Based on IRC § 280A and IRS Publication 587, when using the simplified method, the home area set for business functions is restricted to 300 square feet and deductions cannot be made on actual business expenses related to the home office. The standard deduction allowed per square foot in the simplified method is $5, implying that Nora will only acquire a $1,500 home office deduction. To qualify for this deduction, she should not use her home office for personal activities, but only for business tasks. Home office deductions can be claimed on Nora’s federal income taxes using this method.

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4 Remarkably, there are two options that Nora can consider when assessing her eligibility for deductions, which include the simplified method and the regular method. Many calculations may not be achieved in the simplified method while all actual expenses are calculated in the regular method. Nora should utilize the regular method because it is more accurate than the simplified approach. When using the regular method, all expenses should be calculated and categorized into direct or indirect expenses. Costs that are used for business activities only are grouped as direct expenses while those associated with running the entire home to benefit the home office are part of indirect expenses (Kagan, 2021). When using the regular method, the deduction of indirect costs will focus on the percentage of Nora’s home used for her business and direct expenses will be deducted in full. Unrelated costs will not be part of the home office deductions. All expenses are deductible if they are less than the taxpayers' gross income linked with the business accomplished at their home (Kagan, 2021). However, only a portion is deducted if the costs exceed the gross income. The regular method would be effective for Nora because it provides accurate records. Using the regular method, a 15% deduction will be deducted from Nora's indirect costs because her home office covers 15% of her home, resulting in a $3,596 deduction.

5 References IRC § 280A - Disallowance of certain expenses in connection with business use of home, rental of vacation homes, etc. IRS Publication 334 - Tax Guide for Small Business. Kagan, J. (2021). Home office expense: Meaning, calculation, examples. Investopedia. https://www.investopedia.com/terms/h/homeofficeexpense.asp Publication 587 (2022), Business use of your home. Retrieved from https://www.irs.gov/publications/p587#en_US_2022_publink100012715 Sawyers, R. B., & Gill, S. L. (2020). Federal tax research (12 th ed.). Boston, MA: Cengage Learning.

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