A New Home-Office Write-Off | The IRS is offering taxpayers a simplified home-office deduction, but it might not be your best choice. Here's what you need to know.

Laura Saunders for the Wall St Journal writes: If you are one of the more than four million U.S. taxpayers who work from home, the Internal Revenue Service has a deal for you.

Starting in 2013, the agency is offering taxpayers a simplified home-office deduction. "This common-sense option will simplify record-keeping for many small-business owners and make it easier to claim this deduction," says Faris Fink, commissioner of the IRS's small-business and self-employed division.

It is a striking shift. Until now, all taxpayers taking the home-office write-off had to fill out Form 8829, which has 43 lines and requires complex tracking of multiple expenses, including those for repairs and utilities.

The new option "is good for my clients who hate record-keeping," says Gina Jones of Delhi, La., who prepares returns for farmers, doctors, an arborist and a decorator.

The change also is a bit of a blessing for a write-off long seen as audit bait. "I always explain to clients that they need proper proof, because the deduction could cause scrutiny," says Don Zidik, a certified public accountant at McGladrey LLP in Boston.

There are caveats, of course. The simplified deduction has a cap of $1,500, while the average home office write-off was $2,600 in 2010, the latest year for which data are available. The new method has a lower cap in part because it allows the taxpayer to take a full write-off for mortgage interest and property taxes on Schedule A, Itemized Deductions. Under the complex method, those deductions are split between Schedule A and the small-business tax forms.

The simplified write-off also imposes a one-size-fits-all value of $5 a square foot for home offices, which will likely make the option a nonstarter for taxpayers in pricier urban and suburban areas. Asked how many of his clients would choose the new option, New York CPA Jonathan Horn says, "Zero."

The IRS still is taking comments on the simplified deduction, and a spokesman says the agency could make changes to future versions. For now, taxpayers with home offices can choose between the methods. (For more information, see IRS Publication 587, Business Use of Your Home.)

Here's what you need to know about both.

• To be eligible for a deduction at all, a home office must be used "regularly and exclusively" as a place of business. "That means no toys, exercise equipment, or beds for guests," Mr. Zidik says. (There are special rules for in-home day-care providers.) Often the home office also needs to be the principal place of business, unless it is a free-standing structure like a studio or barn.

Employees, as opposed to the self-employed, can qualify for the deduction if their home office is used for the convenience of their employer—as it could be for a salesman who works far from company headquarters. But employees can't take the write-off if they rent part of their home to their employer for business use.

• Taxpayers using the traditional method need first to figure what percentage of the total property the office accounts for. Then they deduct that percentage of mortgage interest, utility costs, property taxes and other expenses (such as insurance or repairs) from their business income.

Self-employed taxpayers put that deduction on Schedule C, or Schedule F for farmers. The rest of their mortgage-interest and property-tax deductions remain on Schedule A.

In addition, there is an annual depreciation write-off for 1/39th of the office's value. This must be tracked over the years, and the total of all depreciation deductions is supposed to be taxed when the property is sold.

What if the business shows a loss? Then this version of the home-office deduction carries forward to shelter future profits.

• The new simplified deduction is different. Taxpayers are allowed to deduct $5 a square foot for up to 300 square feet of office space, for a maximum deduction of $1,500. Mortgage interest and property taxes don't have to be allocated to different forms and are fully deductible on Schedule A.

Other home-office costs such as insurance aren't deductible, but neither do they have to be tracked. There also isn't any depreciation to be recaptured when the property is sold.

Business expenses unrelated to the home, such as for advertising, equipment and supplies, remain fully deductible.

If the taxpayer uses the simplified deduction and the business shows a loss, however, this write-off can't be carried forward to future years. And if the business turns a profit, then a deduction carried forward from earlier years can't be used.

Taxpayers are allowed to switch back and forth between methods from year to year, but record-keeping issues remain: All depreciation is supposed to be tracked and taxed when the property is sold.

For now, McGladrey's Mr. Zidik says, "We'll probably figure the deduction both ways and use the higher one."