The Home Office Deduction, Simplified


By Jarrod Carter, CPA


June 10, 2014


For taxpayers who use their homes for business purposes, they may reap the benefits from the new, simplified method of the home office deduction. The Internal Revenue Service implemented this new method by reducing paperwork and recordkeeping requirements to ease the burden on taxpayers who claim the deduction.


Previously, the standard method was the only way to claim the home office deduction.  The standard method involves the recordkeeping of various expenses (mortgage interest, utilities, real estate taxes, insurance, general repairs, etc.) and allocating them between personal and business use.  Calculating expenses, depreciation, and carryovers of unused expenses can make this method burdensome.


The easy way for a taxpayer to determine if the simplified method is beneficial is to multiply the square footage of the home office (up to 300 square feet) by $5 and compare that amount with the home office deduction amount calculated on the previous year’s tax return.Â  If the simplified method amount is close or higher, then this method will most likely benefit the taxpayer.  However, if the simplified method amount is less, then the taxpayer may still want to put in the extra time and effort to complete the standard method.


If a taxpayer can use itemized deductions on their tax return, the simplified method is beneficial because home-related itemized deductions (mortgage interest and real estate taxes) can be fully deducted as an itemized deduction instead of being allocated between itemized and business deductions, as is required with the standard method.  However, a disadvantage of the simplified method is that depreciation of the home is disallowed.


A taxpayer may use either method.  Although the simplified method of the home office deduction is much easier to calculate than the standard method, each taxpayer should evaluate whether the convenience is at the cost of tax savings. To determine which method to use, the pros and cons should be weighed.


For qualification requirements and detailed descriptions of both methods of the home office deduction, contact your tax preparer or see IRS Publication 587.

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