The Internal Revenue Service for tax year 2013 has made taking a deduction for your home office easier. You can still use the old way (which may yield a higher deduction depending on your actual expenses and square feet used for your business) or you can use the new way, which is quite a simple calculation. But first, you need to make sure you qualify.
Can I Take a Deduction for Business Use of my Home?
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes, so long as the following is true:
1. You regularly and exclusively use part of your home for conducting business.
2. Your home is your principle place of business.
As long as both 1 and 2 are met, it does not matter whether you own your own business or whether you are an employee of someone else’s business.
What is the Simplified Option?
For taxable years starting on, or after, January 1, 2013 (filed beginning in 2014), you now have a simpler option for computing the business use of your home. For those who don’t like to keep track of their actual expenses, or who just didn’t keep track, the simplified method is like using the standard mileage rate for use of your car. All you need is number of square feet used.
The formula is very simple. You take the number of square feet of your home used for business and you times it by $5. For example, if you have a 10 foot by 10 foot office, you take 100 square feet (10 times 10) time $5 and you get $500. No fuss. No records.
There is one nasty catch, however. The maximum you can claim using this method is $1,500. That is equal to a 300 square foot office, which if square would measure 17.5 feet by 17.5 feet.
There is one big benefit, however, in addition to not having to keep records. You get to deduct all your schedule A items such as interest, property tax, etc., without adjustment.
The Actual Expenses Option
This option uses the actual expenses you incur to make the calculation. Here you add up your rent or mortgage interest, renters’ or homeowners’ insurance, real estate taxes and utilities, and multiply that times the percentage of your house allocable to your home office. For example, if all your allowed expenses add up to $35,000 and your home has 1,500 square feet and you use 100 square feet for your business, the calculation would be $35,000 divided by 1,500 times 100, (dollar amount of expenses times the percentage portion of your office), or $2,333. Your schedule A itemized expenses would then be reduced by any portion included in the $2,333 (the IRS won’t let you deduct it twice).
As a General Rule
As a general rule you can see that the larger your proportional use and/or the larger your total expenses, the Actual Expenses Option would give you a higher deduction, while the lower your proportional use and/or the lower your total expenses, the Simplified Method would give you a higher deduction. The only way to know for sure, however, is to keep your records and do the calculations both ways. Or, you can just bag it, and like standard mileage rates, just take what you can easily get.
If you want the most deductions possible, the most money back, the least amount of hassle, and you want it all legitimate and in compliance with all the tax laws, your very best bet may be to hire a professional. A professional who is worth their salt, will always be worth the money spent. Our sister company Wallace Associates Group is always there to answer your questions and help you determine which route is best for you.