Home Office Tax Deduction

There is an option that makes it simpler for qualifying taxpayers to include a home office tax deduction. The IRS announced a simplified option that many owners of home-based businesses and some home-based workers may want to use to figure their deductions for the business use of their homes.

Beginning this year, taxpayers can use this option. It is an alternative to the current calculation, allocation and substantiation requirements. However, because the new option has limits, a taxpayer may get a larger deduction by continuing to use the current rules.

The deduction is capped at $1,500 each year based on $5 per square foot for up to 300 square feet.

Rules effective for the 2014 (and 2013) tax year and going forward: Taxpayers claiming the optional deduction will complete a different, simplified form. They cannot depreciate the portion of their homes used in a trade or business but they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions. The deductions do not need to be allocated between personal and business use, as is required under the current method.

Important: The new option does not change the current restrictions on home office write-offs, such as requirements that a home office must be used “regularly and exclusively” for business and that the deduction is limited to the income derived from a particular business.

A taxpayer can elect from taxable year to taxable year whether to use the new method or to calculate and substantiate actual home office expenses. An election for any taxable year, once made, is irrevocable. “A change from using the new method in one year to actual expenses in a succeeding taxable year, or vice-versa, is not a change in method of accounting” and does not require IRS consent, according to the new Revenue Procedure.

Ask your tax adviser or contact GTM for more information about the simpler rules for deducting the cost of a qualifying home office.