A home office deduction is one of the more popular self-employment deductions, and it has just gotten a little easier. Beginning in the 2013 tax year (filed in 2014), taxpayers who are eligible to deduct the use of their home for business (e.g. a home office deduction) can choose a simpler option for calculating that deduction.
However, they are still free to continue to use the old home office deduction method. If you do use the new simplified method, it becomes more complicated to change methods in subsequent years (more on that in “depreciation” section below) but it is still possible.
The new method doesn’t change the basic criteria for deducting a home office (such as a home office deduction can't be taken if it would cause your business to have a loss rather than profit), but it sets a standard deduction of $5 per square foot (up to $1,500) for whomever chooses to use this method, regardless of actual expenses. If you use this method you cannot deduct actual expenses. (See what home office expenses are deductible.)
Some considerations when choosing which method to use are:
Size of office - In order to use this simpler method you must have a home office that is smaller than 300 square feet. In the old method there was no limitation on the office size, but the deduction was calculated based on the percentage of the home used for business.
Schedule A deductions – Your deductions for mortgage interest, property taxes and other expenses, which can be partially deducted on Schedule A and partially as part of your home office deduction in the old method, can be fully deducted on Schedule A in the new method.
Depreciation deduction – If you own your home, in the old method you can take a depreciation deduction as part of your home office deduction. (However, taking this deduction can increase your capital gains tax when you eventually sell your home.) The new method does not allow you to take the depreciation deduction. If you use the simplified method for one year and use the regular method for a subsequent year, you must calculate the depreciation deduction for the subsequent year using an optional depreciation table.
Multiple businesses – If you have multiple businesses (owned by either the same or different people) in the same home, you must use the same home office deduction calculation method. Two different business owners (such as spouses) occupying the same home may each take the standard deduction for up to 300 square feet, as long as it is for different space within the home. The same person can only take the deduction on up to 300 square feet, even if it is for more than one business.
Multiple homes – If one business had a home office in two different homes (if you moved, for instance), you are only allowed to use the standard deduction (the simplified method) in one of the homes.
Calculating the deduction – To take the simplified deduction you calculate it on the Schedule C form in Part II. For the old method you still use IRS Form 8829 Expenses for Business Use of Your Home.
I am not a tax attorney, CPA or tax preparation specialist. The information here is meant as a general guide. For specific questions about your own taxes, please refer to IRS publications or consult a tax specialist.