Deducting Your Home Office, Made Simpler This Year

ANN CARRNS for NY Times writes: If you work at a home-based business, you may want to consider a new, simpler option for taking a deduction for your home office on your federal income tax return this year.

The Internal Revenue Service announced last year a streamlined option for the home office deduction, effective for the 2014 filing season. The agency said the new “common sense” alternative aims to reduce paperwork and record-keeping hassles for those who claim the home office deduction.

Approximately 3.3 million taxpayers claimed nearly $10 billion with the deduction in the tax year 2011, the I.R.S. said.

The new “simplified” option involves multiplying the square footage of your home office — up to 300 square feet — by a fixed amount of $5 to determine your deduction, which is capped at $1,500.

To claim the optional deduction, you can complete a short work sheet found in the tax instructions and enter the result on your tax return. (If you’re self-employed, you claim it on Schedule C, Line 30; if you’re employed for someone else, but use a home office, you claim it on Schedule A, Line 21.)

Previously, the only way to claim the deduction required filling out Form 8829, a 43-line document. That option — which the I.R.S. calls the “regular,” or standard method — can involve complex calculations of allocated expenses and depreciation, and carry-overs of unused deductions. That approach, the agency said, can be “burdensome” for small-business owners, because they have to keep all sorts of records, like mortgage and utility statements, to calculate their deduction.

If you use the new option, you can’t depreciate the portion of your home used for business. But you can claim allowable mortgage interest, real estate taxes and insurance losses on your home as itemized deductions on Schedule A. These deductions don’t have to be allocated between personal and business use, as the regular method requires.

As with taxes in general, however, things can be tricky even if they appear simple at first. The new method may be a particularly good option if you’re less than diligent about keeping expense records for use of your home office, said Jessi Dolmage, a spokeswoman for TaxACT, a provider of online tax preparation software. If you do keep detailed expense records, though, you might be better off using the standard method. To be sure, you have to calculate the deduction using both methods. So much for fewer hassles.

Using the regular approach may yield a larger deduction, said Ms. Dolmage, particularly if your office is small.

To get a quick idea of whether the simplified option makes sense, you can multiply your home office’s square footage by $5, and compare the result with your deduction on last year’s tax return. If the result is more or about the same, you can go with the simpler form. But if it’s less, you may want to take the time to calculate your actual expenses.

“If historically you’ve taken a larger deduction, you might be better off with the old-fashioned method,” said Mark Luscombe, principal federal tax analyst for CCH, a tax information provider.

Here are some additional questions about the home office deduction:

■ Does the simplified option make it easier for my work space to qualify as a home office for tax purposes?

No. The simplified option doesn’t change the criteria for a home office; it just reduces the calculations and record-keeping requirements associated with taking a deduction for its expenses. To qualify, you still must use the space regularly and “exclusively” as your principal place of business, according to Mr. Luscombe of CCH. (That means your home office can’t double as, say, your child’s playroom.)

If you work as an employee of a business, rather than being self-employed, your home office must be for the convenience of your employer in order to qualify.

■ If I moved last year and used home offices in different houses, can I use the simplified option?

Yes — but for just one of the homes. The deduction for the other home must be calculated using actual expenses, according to the I.R.S.

■ Where can I find more details about using the simplified option?

See I.R.S. Publication 587, Business Use of Your Home, available online. Or or visit the I.R.S. website for some frequently asked questions about the new option.