New Simplified Method for Computing Home Office Deduction Allows Up To $1,500 Deduction
If you operate a business and use space in your home as a home office, you may now use a simplified method for claiming the home office deduction. This new method applies to tax years 2013 and beyond.
Under the new simplified method the maximum deduction is $1,500 per year and is based on $5 a square foot up to 300 square feet. The IRS says, using the new simplified method will "reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually."
According to the IRS, in tax year 2011, the most recent year for which figures are available, some 3.3 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction) totaling nearly $10 billion.
Normally, home-based businesses are required to fill out Form 8829, a 43-line form with complex expense allocation calculations, depreciation, and carryovers of unused deductions. Under the new simplified method, taxpayers need only complete a short worksheet in the tax instructions and enter the result on their return.
Self-employed individuals claim the home office deduction on Schedule C, Line 30. Farmers claim it on Schedule F, Line 32. Eligible employees claim it on Schedule A Line 21.
Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.
Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible.
The rules for claiming the home office deduction have not changed even if you use the simplified option. This means, you must use the space in your home regularly and exclusively for your business (no letting the kids play video games on your computer in your home office). The space in your home will qualify for the deduction even if you use it to perform administrate activities, such as bookkeeping, calling clients, scheduling appointment, preparing financial reports for your business, etc.
- See the Business Deductions Table of Contents for more on the home office deduction