The home-office tax deduction is something that every home-based business owner loves to hate. From the stories about how taking it increases their chances of getting audited to the complex math required by IRS Form 8829 [PDF], everything about the deduction is a pain, albeit a necessary one.
The good news: If you maintain a home office, your life got a lot easier in 2014 when the IRS announced a simpler way to deduct home office expenses.
The Old vs. The New
When you file your personal federal income taxes, you have the option to take the standard personal deduction or to itemize your expenses. Itemization [PDF] requires you to identify and be able to document
each deduction, whereas the standard deduction does not. Taxpayers typically choose the deduction method that results in a lower tax liability.
Currently, the home office deduction also requires itemization. In order to claim the deduction, you calculate the percentage of your home’s total square footage that your office occupies and deduct allowable business expenses accordingly.
For example, if your office occupies 10 percent of your home’s total square footage, you may deduct 10 percent of your household expenses, such as rent or mortgage payments, repairs, and depreciation. The potential problems lie in knowing what an allowable expense is, carrying over unused deductions, and using accurate square footage.
The IRS offers a standard home office deduction of $5 per square foot, up to 300 feet. This makes the total deduction a maximum of $1,500. Just like the standard deduction taken on a personal return, this will require much less time and paperwork. The IRS calls the new deduction an “option,” indicating that the old method of calculating your deduction is still available, too.
Some Things Don’t Change
The much hoped-for simplified process of deducting home office expenses does not change the rules that come with qualifying for it. The office space must be used exclusively and regularly for business activities related to your primary business. Using your office to pay family bills doesn’t qualify. Researching stocks or other investments for your IRA probably won’t qualify either.
In order to qualify, you must use the space at least 15 days per month. If you are allowed the maximum 300 feet, but you only used it for eight months, you’ll have to prorate the expense by a third.
To learn more about the home office deduction, read about the guidelines in the Simplified Option for Home Office Deduction.