If you are eligible to claim a home office deduction, calculating it can be a challenge for some taxpayers. The IRS has allowed a second method for calculating your business use of home deduction that is a lot simpler than the original method.
A deduction is permitted for expenses associated with the portion of your home that is exclusively used on a regular basis either (1) as your principal place of business; (2) as a place of business that is used by patients, clients, or customers in meeting or dealing in the normal course of your trade or business; or (3) in the case of a separate structure that is not attached to your home, in connection with your trade or business. This area must be exclusively for business use only; it cannot be used for business purposes during the day and then a family area at night.
If you meet these qualifications, you are entitled to take the deduction in one of two ways.
- Actual Expense Method – this method is used to take a portion of the expenses as your deduction based on the square footage of the room compared to the square footage of the entire home and reported on Form 8829. There are many expenses that qualify under this method, to learn more about this method take a look at our Home Office Deduction blog.
- The New Safe Harbor – effective for this tax year (2013), this method allows you to multiply the square footage of the home office, not to exceed 300 square feet by $5, up to a $1,500 deduction. This new deduction is reported on your Schedule A if you itemize and does not lower the gross business income reported, the way using Form 8829 would.
You are able to take whichever would be more beneficial for you, and you can change methods from year to year. Discuss with your tax preparer which method would mean saving the most tax dollars for you next tax season.