IRS Simplifies Home-Office Deduction Change Should Cut Paperwork for Small Businesses

Tom Herman for the Wall St Journal writes: There's good news for some taxpayers who qualify for a home-office deduction: This year's federal income-tax forms include an optional—and simpler—new method to claim it.

In the past, you had to fill out a lengthy form and master complex instructions that discouraged some people even from trying.

Under the optional new method, you can claim "$5 per square foot of space that meets the definition of a qualified home office up to a maximum of 300 square feet," says Mark Luscombe, principal tax analyst at CCH, a Wolters Kluwer WTKWY +0.95% unit that sells tax and other business information and software.

Thus, the maximum amount that can be deducted using this method is $1,500. CCH offers this example: Suppose your home office measures 18 feet by 15 feet, for a total of 270 square feet. Multiply that by $5. Your total home-office deduction would be $1,350.

This new option "saves time compared with the other home-office tax deduction calculation of figuring related expenses and how they may apply over the course of the year to a home office," CCH says.

The simplified deduction "would replace items that you had to allocate between personal use and business use, such as utilities and property insurance," Mr. Luscombe says, "but it would not replace deductions totally related to the business, such as supplies."

You can also continue to take allowable home-related itemized deductions—such as mortgage interest or real-estate taxes—on Schedule A, the Internal Revenue Service says. The change, a rare move toward simplification by the IRS, could help many people who work at home.

An estimated 3.3 million filers claimed deductions for business use of a home for the 2011 tax year, according to an IRS spokesman.

But the new method isn't a smart idea for everyone. Taxpayers "might be better off using the old-fashioned way" if their home-office deductions exceed the $1,500 limit, Mr. Luscombe says.

This new option does not change the eligibility criteria for taking the deduction.

As a general rule, you must use the home office exclusively and regularly for work. For qualifications and other fine print, see IRS Publication 587.

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