This post was updated March 31, 2017. Original text can be found here.
Claiming a home office can help reduce your sole proprietor tax bill. But do so typically entails a lot of record keeping.
Some small business owners, however, might find that the simplified home office deduction works just find for them.
This option, which first appeared as a deduction choice for 2013 federal tax returns, is easier.
But there's also a limit on how much it can help, meaning that the easier way to claim a home work space is not necessarily right for everyone who has one.
Less paperwork: Instead of filling out the 43-line Form 8829 to claim your home-office deduction, you can use the significantly streamlined worksheet in the Schedule C instructions.
Click worksheet image for a larger view.
The simplified method is based on $5 per the square footage of your home office up to 300 square feet.
This calculation will limit your home office write-off to a maximum $1,500, which also is this week's (March 23-27, 2014) By the Numbers figure.
If your home work space is smaller, then your deduction amount will be less.
Easier not always better: The simplified home office deduction method will appeal to many because it requires little or no record keeping.
Instead of determining all your actual home expenses, such as mortgage interest, utilities, insurance and home maintenance and then calculating the portion of them that apply to your home office, you just use your office space's size.
But while easier will save you some time, it might not save you as much tax money.
If you have a larger office and/or more substantial expenses related to your home office, you might be better off using the original and more complicated deduction method. So you need to run the numbers, at least preliminarily, before you make a final deduction choice for the tax year.
And tax pros say even if the IRS says you don't have to keep records (yeah, right…), it's a good idea to keep track of all your business expenses anyway.
Home office rules still apply: Note, too, that regardless of which home office deduction method you use — and you can decide and change it as necessary each tax year — your home office still must meet the tax rules to be counted as a tax-deductible work space.
If you are the business owner, your home office must meet two requirements. Your home-based office must be:
- Used regularly and exclusively for business. It doesn't have to be a separate room; a portion of room designated for work use only counts. But regardless of how large or small, the room or area cannot be used for personal tasks, too.
- Used as your principal place of your business. This is possible even if you conduct business outside your home, for example, to meet with clients, as long as you use your home substantially and regularly to conduct business.
If you are an employee who has a home office, you also might be able to deduct that space as long as you meet the regular and exclusive and principal place of business tests, as well as show that your home business use is for the convenience of your employer and not just to make your work life easier.
You can find more about home office use and other business tax deductions in this article and in IRS Publication 587, Business Use of Your Home.
You also might find these items of interest:
- Writing off business use of your cell phone
- 5 ways to maximize tax-deductible business entertainment
- Profit motive is critical to sustain business tax deduction claims
