The IRS has published a reminder that those who have a home-based business or a home office can use a simplified approach to claim deductions for the portion of their home dedicated to business use.
Simplified Method for Home Office Deductions
The new method, known as the simplified method, is outlined in IRS Publication 587. Rather than using the actual expenses related to their home office, taxpayers can calculate the simplified deduction by multiplying the square footage of the portion of their home used for a home office by $5.
Under the simplified method, the size of the home office is limited to 300 square feet.
For taxpayers who elect to use the simplified method, they cannot deduct actual business expenses related to their home office, although business expenses unrelated to their home office are still deductible. In addition, taxpayers using the simplified method cannot deduct depreciation on their home that is related to their home office.
However, under the simplified method, taxpayers can still deduct certain other personal expenses even if there is not a qualified business use of their home. These expenses include amounts paid for mortgage interest, real estate taxes, and casualty loss.
A taxpayer can elect to use the simplified method for calculating the home office deduction each tax year.
Calculating the Home Office Deduction under the Simplified Method
For taxpayers to use the simplified method for calculating the home office deduction, the taxpayers need to know three things:
- The area of their home used for conducting the business
- The gross income generated through business use of their home
- The amount of business expenses unrelated to the business use of the home
If the business is a daycare, taxpayers will also need to know the percent of time space in their home is used as a daycare.
The simplified method is calculated using the following steps:
- Multiply the space used for the home office by $5. In the case of a daycare, the amount will also be multiplied by the percent of time the space is used as a daycare.
- Subtract the business expenses unrelated to business use of the home from the gross income generated through business use of the home. If the amount is less than zero, then the taxpayer cannot take a home office deduction.
- Use the lower of the amounts calculated in steps 1 and 2 as the amount that can be deducted under the simplified method.
Effect of Simplified Method for Home Office Deduction
In 2011, which is the most recent year for which complete estimates are available, approximately 3.3 million taxpayers claimed a deduction for a home office or home-based business. The IRS estimates the simplified approach to home office deductions will save individuals and small businesses over 1.5 million hours annually. The savings will come in the form of reduced time maintaining records and completing the old process to calculate the deduction on their federal income tax return.
However, as a taxpayer can elect to use the old or new method each tax year, taxpayers may still be wise to calculate their deduction using both methods, to ensure they use the approach for home office deductions that gives them the largest allowed tax deduction.
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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.