Editorial · February 8, 2014
Home Office Deduction: The Simplified Method Explained
The home office deduction has a simpler option for 2013 returns. Instead of adding up your actual home costs, you can claim $5 for each square foot of your office, up to 300 square feet. The most you can claim this way is $1,500 a year. The IRS announced the option on January 15, 2013, and it starts with tax year 2013 (returns filed in 2014).
The IRS says the option does not change who can claim the deduction. It simplifies the math and the recordkeeping.
Who can claim a home office deduction
Both methods start with the same tests. In most cases, you must use part of your home regularly and only for business. A den that your family also uses for fun does not count. The space must also be your main place of business, a place where you regularly meet clients or customers in person, or a separate building such as a studio, garage or barn.
Your home office can be your main place of business if you regularly use it for administrative or management tasks, such as phoning customers and keeping books, and you have no other fixed place where you do substantial work of that kind. Renters and owners can both claim the deduction.
Employees face extra rules. For example, your use must be for the convenience of your employer. Use that is merely appropriate and helpful does not count. You generally must itemize, too. An employee who gets advances, allowances or reimbursements for home office costs under an employer's reimbursement or allowance arrangement cannot use the simplified method.
How the simplified method works
- Measure the part of your home that you use regularly and only for business. Count no more than 300 square feet.
- In most cases, multiply that area by $5.
- Check the income limit. The deduction cannot be more than your gross income from the business use of your home, minus business costs that are not for the home itself. Claim the smaller amount.
Anything over the income limit is lost, with no carryover to a later year. You also cannot deduct depreciation on the office itself, though you can still depreciate furniture and equipment. Business costs that are not for the home itself, such as advertising, supplies and wages, can still be deducted.
If you own your home and itemize, you still deduct your allowable mortgage interest and real estate taxes on Schedule A.
More limits apply. If you used the space for part of the year or changed its size, add up each month's area (300 square feet at most) and divide by 12. A month with under 15 days of use counts as zero. You can use the method for only one home in a year. Space you rent out is figured separately, using actual expenses. People who share a home can each use the method, but not for the same part of the home.
How actual expenses compare
With actual expenses, which the IRS also calls the regular method, you find the share of your home that the office uses. You apply that share to costs for the whole home, such as rent, utilities and insurance.
| What changes | Simplified method | Actual expenses |
|---|---|---|
| How it is figured | $5 per square foot, 300 square feet at most | Office share of your real home costs |
| Records | You do not have to prove your actual home costs | Keep records of your actual costs |
| Depreciation | None on the office, so nothing to recapture for those years | Allowed if you own the home, but you may have to recapture it when you sell |
| Mortgage interest and property tax | All on Schedule A, if you itemize | Business share on Schedule C or F, the rest on Schedule A if you itemize (most employees: all on Schedule A) |
| Over the income limit | Lost | Carried to the next year you use actual expenses |
Which method fits your office
The rough test below is our own math, not an IRS rule. It fits renters, and owners who itemize. It ignores the income limit and depreciation. Add up a year of whole-home costs like rent, utilities, insurance and general repairs. Leave out mortgage interest and property taxes, which itemizers can deduct either way. Divide the total by the square feet of your whole home. Above $5, actual expenses will likely give you more. Below $5, the simplified method may give you more.
Say a renter has a 150 square foot office in a 1,000 square foot apartment. Rent, utilities and insurance run $12,000 a year, or $12 per square foot. The office is 15 percent of the space, so actual expenses give $1,800. The simplified method gives 150 times $5, or $750. Owners can add depreciation under actual expenses. If your office is over 300 square feet, compare the office share of your costs with $1,500.
You can switch methods from year to year, but your original, on-time return locks in the choice for that year. One trap: if the income limit blocked home costs in an earlier year, you cannot use them in a simplified year. They wait for the next year you use actual expenses.
Where to report it and what to keep
Schedule C filers who pick the simplified method skip Form 8829 for that home. They use the Simplified Method Worksheet in the Schedule C instructions and enter the result on line 30, filling in the two square footage spaces there. Other filers, such as employees and farm filers, use a worksheet in Publication 587. Most employees claim the amount on Schedule A, subject to the 2 percent of adjusted gross income limit.
Keep records that show which part of your home you use for business, and that you use it regularly and only for business.
This article is general information, not tax advice. Daycare providers and sellers who store inventory at home have their own rules. Read Publication 587 or ask a tax professional before you file.