What You Need to Know about the Home Office Tax Deduction

Date: April 03, 2013

The IRS’s new, more simplified flat-rate version makes filing a whole lot easier, but is it the right choice for your business?

For small-business operators working from home, the government offers a nice tax break: The home office deduction. Simply put, a business owner can take a tax deduction for any part of the home used strictly for business, along with an equivalent percentage of expenses such as utilities.

Kristine Tanzillo, president of Dux Public Relations in Canton, Texas, says taking the tax break is relatively easy, but it requires a lot of record-keeping. “Since we take a percentage of electric and water costs as an office expense, we keep copies of all utility bills with our business expenses. If we buy office fixtures such as lights or ceiling fans, we make the purchase with our business credit card, which is paid out of our corporate account,” she says.

Forget all that. Starting in 2014, the IRS will be introducing a simplified version of the home office deduction, much to the relief of many business owners tired of keeping volumes of receipts and calculating endless percentages.

The new flat-rate deduction will allow in-home businesses to deduct $5 per square foot, for a $1,500 maximum, explains Chris Whitcomb, tax counsel to NFIB. “This will get rid of the need for all these complicated calculations,” he says.

The new deduction may come as a particular benefit for those who have never taken the home office discount in the past, as least so far as record-keeping goes.

“Generally speaking, when we do home office deductions, the first year we take one is the hardest. You have to go back and do a lot of calculations,” says David Goldner, managing partner of CPA firm Gross Mendelsohn in Baltimore. “Once you do that, it goes much smoother from that point on.”

Still, even an easy home office deduction is rarely easy.

Chris Whitcomb, Tax Counsel for NFIB
Chris Whitcomb, NFIB Tax Counsel

“Home office is a pain-in-the neck deduction as previously computed, before this new system came into play,” Goldner says. “There is a lot of difficulty in record keeping, a lot of detailed information you need in order to take the deduction. There are complicated calculations.”

If you’re struggling with the math, you’re not alone. The IRS says nearly 3.4 million taxpayers claimed deduction for business use of a home in 2010, the most recent year for which figures are available. The new formula will save taxpayers 1.6 million hours a year, the IRS says.

But will it save them money?

Whitcomb suggests that actual dollars saved (or not) may matter less than the time, effort, and hassle to be avoided. “The cost benefit analysis will really be: ‘Is it worth my time to go through these calculations?’ For a lot of people, if you are worried about having to keep records, you are going to get more value out of this simplified deduction,” he says.

One thing at least seems certain, Whitcomb says. Most people who do take the deduction are going to be claiming the max under the new formula. The $1,500 deduction translates to 300 square feet, which most people doing business at home likely will be able to legitimately claim.

The key word, of course, is “legitimately.” It’s only a home office if you use the space exclusively for trade or business purposes. In addition, an employee can take the deduction if his or her boss requires that home space to be dedicated to work activities.

For those who truly do work from home, “the vast majority of people will be able to say that they have 300 square feet dedicated to home office use,” Whitcomb says.

RELATED: Tax Resources for Small Business

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