Do you work from your own home? If so, you may be entitled to deduct home office expenses on your personal income tax return. Taxpayers are sometimes hesitant to use this deduction, but the IRS recently published a reminder about a simplified deduction method that eliminates most of the hassle.
But that’s only part of the story. In fact, you may be able to claim a bigger home office deduction if you do things the old-fashioned way.
To qualify for deductions, your home office typically must be used regularly and exclusively as your principal place of business or a place to meet clients, patients, or customers in the normal course of business. Alternatively, you may be able to deduct expenses of a separate structure, like a barn or detached garage, used for storage.
If you’re an employee, the home must office must be expressly used for the employer’s convenience. For this reason, self-employed individuals usually claim these deductions.
The IRS also reminds you that you can deduct your legitimate expenses, including a proportionate share of expenses for the entire home (e.g., insurance, repairs, mortgage insurance, and property taxes), plus a depreciation allowance, if you keep the proper records. However, they also advise that a simplified method, which first became available for 2013 returns, is more convenient. Under the simplified method, just multiply the total square feet of your home office by $5, up to a maximum deduction of $1,500. No fuss, no muss.
Nevertheless, in many instances, your total deductible expenses would exceed $1,500 for the year, especially when you add in depreciation. For example, if you use 10% of your home as a business office and the total eligible home expenses are $25,000, you come out at least $1,000 ahead with the regular method ($2,500 – $1,500 maximum).
It’s important to realize the home office deduction is one of the stickier areas of tax regulation. Before you decide which method is best for you, let’s have a conversation to go through the details.