What is The Simplified Home Office Deduction?
If you happen to have a home office, you may be able to use it as a deduction when it comes to the cost of running your home business.
The problem with the home office deduction is it’s a complicated issue. Due to the fact it’s open to abuse, the IRS came down hard on people years ago.
But if you’re eligible, you should absolutely claim the deduction. It looks like a hassle, but it’s not as difficult as you might think to claim.
To make the lives of American taxpayers easier, the IRS brought in the simplified optional home office deduction. Starting in 2013, this simplified option became available.
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How Does the Simplified Home Office Deduction Work?
For anyone who wants to claim the simplified home office deduction, the IRS allows you to claim a deduction that’s based on the square footage of your office. It’s worth $5 for every square foot that makes up your office space. The deduction is capped at $1,500 per year, so the maximum space you can claim is 300 square feet.
The reason why you should claim the simplified home office deduction is you don’t have to keep records for utilities, rent, mortgage payments, and more.
How Does Claiming This Deduction Impact You?
Take note that if you claim the simplified deduction, you can’t then claim the depreciation deduction for your home office.
But you can still claim certain allowable deductions for things like real estate taxes, allowable mortgage interest, and casualty losses. These can be claimed as itemized deductions.
The above deductions don’t need to be separated into personal and business use.
Other business expenses not related to any home office, such as supplies, wages, and advertising, remain fully deductible when you file your taxes and claim this deduction.
The Rules Still Apply to Your Home Office
Taking the simplified home office deduction doesn’t change the fact that you still need to qualify for the home office deduction under the standard rules.
You need to make sure you meet one or more of these requirements:
- You use your home office as your primary place of business.
- You use your home office for management or administrative duties regularly and exclusively, without another fixed location where these same duties are carried out.
- You meet customers or clients in your home office.
- You have a separate outbuilding you use purely for the purposes of business.
- You use your home office as a place to store product samples or inventory.
- You run a daycare center in your home.
If you happen to be an employee, you must also use your home because it’s more convenient for your employer. Additionally, you need to meet the above requirements.
Should You Take the Simplified Home Office Deduction?
You should only take this deduction if the difference between the simplified deduction and the conventional deduction isn’t significant.
If you happen to rent your home, you may be able to claim a lot more than $1,500. In that case, it doesn’t make sense to claim the simplified deduction.
Let’s use an example.
If you pay $1,000 a month in rent and you have a 100 square foot home office, you would only get $500 using the optional deduction. But using the regular deduction, you would get $1,200.
We recommend you calculate your deduction using both methods so you can determine which option offers the biggest deduction.
The downside of the regular deduction is that you’re required to keep accurate records. But it can lead to getting significantly more as part of your deduction.
However, if you use an online tax preparation platform, you’ll find it much easier to claim the home office deduction.
Which home office deduction is best for you?
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Frank Ellis is a Traverse City Tax Preparation Planner and published author. He has written tax and finance related articles for twelve years and has published over 1000 articles on leading financial websites.