The Home Office Deduction

Taxpayers can take the home office deduction if they use a portion of their home regularly and exclusively for business. That portion of their home could be the taxpayer’s main place of business, a place where the taxpayer meets patients, clients or customers in the normal course of business, or a place to store inventory or samples. It can also be a separate structure that is not attached to the taxpayer’s home (such as a garage or barn) as long as it is used regularly and exclusively for business.

Taxpayers can claim the deduction whether they are a homeowner or a renter. It can be used for a house or apartment, but not for a hotel or other temporary lodging.

There are two options for figuring and claiming the home office deduction:

● Regular method: direct expenses (such as repairs solely in the home office) are deducted in full, while indirect expenses (such as the home’s mortgage interest, rent, utilities, insurance, real estate taxes, repairs, and depreciation) are deductible based on the size of the home office as a percentage of the entire home.

● Simplified method: If the home office is 300 square feet or less, the taxpayer deducts $5 per square foot of the home office, up to a maximum of $1,500 for a 300-square-foot space. The simplified method reduces the paperwork and recordkeeping for small businesses.

The home office deduction is presently only for self-employed taxpayers. Between 2018-2025, employees cannot deduct home office expenses. (Prior to 2018, employees could deduct home office expenses under miscellaneous deductions subject to the 2% floor, including unreimbursed employee business expenses.)

401(k) Contribution Limits Increase for 2020; IRA Contribution Limits Unchanged

The contribution limit for employees who participate in 401(k) plans increases from $19,000 to $19,500 for 2020. The catch-up limit rises to $6,500, which results in a total limit of $26,000 for people aged 50 and over in 2020.

The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

Farmers and Ranchers Affected by Drought Have Extra Time to Sell Livestock

Drought can be devastating to farmers and ranchers. Those who were forced to sell livestock due to drought may get an additional year to replace the livestock and defer tax on any gains from the forced sales.

The one-year extension gives eligible farmers and ranchers until the end of the tax year after the first drought-free year to replace the livestock that was sold on account of drought. As a result, qualified farmers and ranchers whose drought-sale replacement period was scheduled to expire at the end of this tax year, December 31, 2019, in most cases, now have until the end of their next tax year.

The farmer or rancher must be in an applicable region, which is a county designated as eligible for federal assistance plus counties contiguous to that county. The farmer’s county must be listed as suffering exceptional, extreme or severe drought conditions by the National Drought Mitigation Center. All or part of 32 states, plus Guam, the U.S. Virgin Islands, Puerto Rico, and the Northern Mariana Islands, are listed. The list of applicable regions is in Notice 2006-82 (https://www.irs.gov/pub/irs-drop/n-19-54.pdf).