Taking the Home Office Deduction

If you work from home and have a dedicated home office space to perform that work, you probably already know you can take a deduction on your tax return for costs related to that space.  Historically, the deduction has been based on the percentage that the square footage of the office space is of the total square footage of the home.  The home office deduction is then calculated by multiplying the pro-rata percentage of the home office space times the indirect costs of the home (e.g. rent or mortgage interest, insurance, utilities, repairs and maintenance, etc.) plus, in the case of a home that is owned, a pro-rata share of the home’s depreciation should be calculated.

Many people have avoided taking the home office expense on their tax return because they found the above method to complicated, too much of a hassle to track the expenses, or they felt it would be a red-flag inviting an audit from the IRS.  Additionally, the depreciation expense that is recognized in the home office deduction reduces the seller’s basis in the home when it is sold.

Simpler Method of Home Office Deduction

But as of 2013, there is a simpler method for computing the home office deduction.  The IRS now allows the home office deduction to be calculated by multiplying $5 per square foot of office space, up to 300 square feet, for a maximum deduction of $1,500 per year.  This will save time and effort of having to keep track of all the indirect expenses of the residence.  And under this simplified method, depreciation is treated as zero and does not reduce the basis in the home.  In addition, taxpayers can still claim the full amount of home mortgage interest and real estate taxes on their Schedule A.

Criteria for Claiming Home Office Remains Unchanged

But keep in mind, this simplified method does not change the criteria for what home office space can be deducted, it merely simplifies the calculation and record keeping requirements of the allowable deduction.  As with the original method, a taxpayer may only deduct the expense of the home office if the space is exclusively used on a regular basis for business purposes.

For more information on the home office check out this information on IRS website:  http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Home-Office-Deduction