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IRS offers an easier way to deduct your home office

Business tax reform has been getting a lot of attention the last few years, with both President Obama on the Democratic side and House Ways and Means Chairman Rep. Dave Camp on the Republican side pushing for change.

While Congress and the White House debate tax reform as it relates to big business, the Internal Revenue Service already has made a change to ease tax filing for many owners of smaller companies.

For 2013 returns, individuals who claim a home office can choose between using the regular deduction method or the new simplified way to write off their residential workspace.

Home office helper Mickey courtesy Lisa Dragon Flickr CC
A home office helper, courtesy lisadragon via Flicker CC.

Today's Daily Tax Tip looks at the simplified home office tax deduction. But the easier way to claim a home office is not necessarily right for everyone who has one.

Less paperwork: This filing season, instead of filling out the 43-line Form 8829 to claim your home-office deduction, you can use the significantly streamlined worksheet in the Schedule C instructions.

Simplified home office deduction worksheet
Click worksheet image for a larger view.

The new simplified method is based on $5 per the square footage of your home office up to 300 square feet.

This calculation will limit your home office write-off to a maximum $1,500, which also is this week's By the Numbers figure.

If your home workspace is smaller, then your deduction amount will be less.

Easier not always better: The simplified home office deduction method will appeal to many because it requires little or no record keeping.

Instead of determining all your actual home expenses, such as mortgage interest, utilities, insurance and home maintenance and then calculating the portion of them that apply to your home office, you just use your office space's size.

But while easier will save you some time, it might not save you as much tax money.

If you have a larger office and/or more substantial expenses related to your home office, you might be better off using the original and more complicated deduction method. So you need to run the numbers, at least preliminarily, before you make a final deduction choice for the tax year.

And tax pros say even if the IRS says you don't have to keep records (yeah, right...), it's a good idea to keep track of all your business expenses anyway.

Home office rules still apply: Note, too, that regardless of which home office deductiion method you use -- and you can decide and change it as necessary each tax year -- your home office still must meet the tax rules to be counted as a tax-deductible workspace.

If you are the business owner, your home office must meet two requirements. Your home-based office must be:

  1. Used regularly and exclusively for business. It doesn't have to be a separate room; a portion of room designated for work use only counts. But regardless of how large or small, the room or area cannot be used for personal tasks, too.
  2. Used as your principal place of your business. This is possible even if you conduct business outside your home, for example, to meet with clients, as long as you use your home substantially and regularly to conduct business.

If you are an employee who has a home office, you also might be able to deduct that space as long as you meet the regular and exclusive and principal place of business tests, as well as show that your home business use is for the convenience of your employer and not just to make your work life easier.

You can find more about home office use and other business tax deductions in IRS Publication 587, Business Use of Your Home.

You also might find these items of interest:


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