To make life easier for taxpayers, the IRS allows you to use a simplified method for figuring out the allowable home office deduction on your tax return. But, the traditional approach will almost always produce a bigger deduction than the short-cut method.
To qualify for home office deductions, you must use the office space regularly and exclusively as your principal place of business or a place where you meet or deal with customers, clients or patients in the normal course of business. Also, if you're an employee, you must use the home office for the convenience of your employer.
For example, if you're self-employed and you run your business from home, you may be entitled to deductions.
When using the traditional method, you may write off the direct expenses of your home office plus a proportionate share of indirect expenses, like:
- Mortgage interest*
- Property taxes
In addition, you can claim a depreciation deduction for the part of the home used as an office.
However, the traditional method requires you to keep detailed records of expenses. Then you have to work through the 43 lines of Form 8829, Expenses for Business Use of Your Home
, when you file your return.
If you use the simplified method, all you have to do is calculate the square footage of your home office space and then deduct $5 per square foot, up to a maximum of $1,500.
When you add up all your deductible home office expenses, the total will usually exceed the $1,500 maximum amount allowed by the simplified method.
Assume that you have $1,200 in direct expenses for your home office plus your indirect expenses for the home- including utilities, insurance and repairs- amount to $10,000 for the year. For simplicity, we'll disregard mortgage interest and property taxes that would otherwise be deductible. Also, based on the IRS table, you may claim a $300 depreciation allowance.
As a result, you're entitled to deduct $1,200 in direct expenses, $1,000 in indirect expenses (10% of $10,000) plus $300 in depreciation, for a total of $2,500. That's $1,000 more than the simplified method ($2,500 - $1,500).
You can switch between the traditional and simplified methods year-to-year.
*Mortgage interest and property taxes are deductible on 2017 returns
From Small Business Tax Strategies, April 2018