Simplified Home Office Deduction: What are the Benefits?

If you use a part of your home for business, you may be able to deduct expenses for the business use of your home and claim the home office deduction. The Tax Adviser notes that “Sec. 280A © permits self-employed individuals and employees who work out of their home to deduct business expenses relating to the part of their home that is exclusively used on a regular basis to carry on a trade or business, or, in the case of an employee, the person has no other fixed location to perform his or her job duties”. This space must only be used for business purposes. Traditionally, this deduction required taxpayers to complete complex computations and allocations, and perform extensive recordkeeping. Starting with the 2013 tax year, taxpayers have the option of applying the simplified method in which taxpayers multiply the total square footage of the business portion of the personal residence, up to a maximum of 300 square feet, by $5. Although this method sounds much easier, there are costs and benefits that should be considered when deciding which method to use.

The advantages of the simplified method:

• The method greatly reduces the recordkeeping burden.
• The simplified method may offer a larger home office deduction.
• If the simplified method produces a smaller home office deduction, increase in self-employment income may lead to slightly higher Social Security benefits at retirement.
• Taxpayers may change from the actual-cost method to the simplified method on a year-by-year basis.
• In any year that the simplified method is used, the depreciation taken in that year is presumed to be $0, so there would be no recapture of depreciation for those years upon the sale of the home.
• The method allows for no reduction for home mortgage interest and property tax itemized deductions.

The disadvantages of the simplified method:

• The maximum deduction allowed is $1,500.
• The simplified method may increase self-employment taxes.
• If the home office deduction causes a loss from the related business, that loss may not be carried over to future years.
• While the simplified election is made on a year-by-year basis, once an election is made, it is considered to be irrevocable and may not be changed on an amended return.

For more information about the simplified home office deduction, click this link. If you have any questions or would like another blog post on the home office deduction, let us know in the comments below!