The home office tax deduction has been difficult to claim in the past. Luckily, the IRS has made it far more accessible in recent years. How, you ask? By simplifying the process as a whole. The IRS released the simplified option in 2013 which can save taxpayers a significant amount of time and paperwork. The simplified option is ideal for businesses that don’t claim enough to make it worth the trouble of using the traditional deduction. It’s best to explore all of your options before deciding which method works best for you and your business. Take a look at the difference between the traditional and simplified methods for claiming the home office tax deduction.
Traditional Home Office Tax Deduction
The IRS’s set of rules for calculating the home office tax deduction using the traditional method is vastly different than using the simplified process. If you use the traditional method, your calculation will be based on the actual expenses related to your entire house. In addition, you must provide substantial evidence that you’ve paid for these expenses and completed all paperwork required by the IRS. The limit is determined by factors such as income and business expenses not directly associated with the business use of your home. Although many people consider the traditional method to be an effective way to calculate the home office deduction, many also find that the process is a bit more complicated than other available options. As a result, the IRS developed the simplified method to help taxpayers easily calculate their home office tax deduction.
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Simplified Option for Home Office Tax Deduction
If you choose to use the simplified method, you’ll need to comply with the IRS’s fixed deduction rate. This means you’ll calculate your deduction by multiplying the square footage of your home office by the fixed rate. The fixed rate for 2013 was $5 per square foot. Although the simplified method has several benefits, it still maintains a maximum deduction of 300 square feet. In turn, this means that the maximum amount anyone is able to deduct is $1,500.
Rules for Using the Simplified Option
1. Permanent Choice: You cannot switch between the actual expense method and the simplified method for any tax year. In addition, you can’t opt for a different method later on.
2. Depreciation Limits: If you choose the simplified method and you own your home, you’re not allowed to depreciate your home office. On a positive note, you are still allowed to deduct mortgage interest and real estate taxes as an itemized deduction.
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How to Apply the Home Office Deduction
If you feel that using the traditional method to calculate your home office tax deduction isn’t time well spent, you should consider using the simple option. The simplified method is a time saver and only requires a quick measurement of your home office.
Keep in mind that the 300 square foot limitation includes storage space used for your business. That being said, most home offices are in rooms that may otherwise be considered or used as a bedroom. These type of rooms often have closets which need to be included in your calculation. If you have a spare bedroom, it may be beneficial tax-wise to convert it into an office space to utilize this opportunity.
If you have questions and need help determining which option could maximize your time and deduction the most, feel free to contact us. We’ve helped several of our clients consider their options and could easily help you do the same. If you have a space in your home that is used for work or work storage, there’s no reason not to claim it.
Do you plan on switching to the simplified option this year? If not, is the traditional option worth your time?
By: Leslie Baker
CPA, Accountant at WHH
