The New Home Office Deduction: Do You Meet The Criteria?

A new deduction for home-based workers could save you time and money on federal tax returns.
December 20, 2013

Millions of Americans work every day in their homes, and the IRS has a new option for deducting that on federal income tax returns.

The optional home office deduction is in effect for tax year 2013 and can be used on returns that are filed in 2014.

Home-based workers will now be allowed to claim a deduction of up to $1,500 a year for their workspace, based on $5 a square foot for 300 square feet of space or less. (The office space must meet the IRS rule that the home office is used regularly and exclusively for business.)

Less Paperwork, Less Record-Keeping

Taxpayers still have the option of using Form 8829 to calculate their home office deduction, but the IRS estimates that using the new option will save small businesses more than 1.6 million hours each year in record-keeping and paperwork. But is it the right option for you?

"The new method for the home office deduction is certainly helpful in reducing the paperwork and time for filing. However, it's not best for every small-business owner," says Ryan Himmel, a New York state CPA and CEO of BIDaWIZ, an online network for professional tax advice and services.

Himmel says the new option works best for individuals whose home office expenses stay below $1,500 a year or require less than 300 square feet.

"I suggest home-based business owners first assess whether the $5 per square foot calculation will be more or less than the $1,500 limit. If it’s below the limit and they don’t have significant depreciation expenses, then it may make a lot of sense to use the new simple form. If the amount is well over $1,500 or you have large depreciation expenses, then going through the old Form 8829 will probably be your best option," Himmel says.

Wendy Baker, an enrolled agent with her own home-based business preparing tax returns for individuals, agrees, and adds, "Have your tax professional run the scenario for both options to determine which will work best for you, not just for this tax year but in the future as well."

Run The Numbers

Andrew Poulos, principal at Poulos Accounting and Consulting in suburban Atlanta, says the new home office deduction calculation may make it easier for more home-based workers to take a deduction.

"Traditionally, the home office deduction has been a red flag for audits and has been problematic for those who want to take the deduction and were afraid to because they didn't have adequate records to substantiate their deduction," Poulos says. "The new home office safe harbor method released in January 2013 provides an optional safe harbor method that taxpayers may use to calculate the home office deduction." 

Freelance journalist Miranda Marquit works from home and has already run the numbers.

"My home office is relatively small so I am likely to use the new rule when figuring my deduction. It works out to close to the same amount for each method in my case, but the new rule makes reporting easier," Marquit says.

If you're one of the 13 million or more Americans who regularly skip the commute and simply walk down the hallway to get to work, you can make a choice on your next tax return about taking the home office deduction. The first step is making sure your space meets the IRS criteria for a home office. The second step is calculating whether the new simplified deduction makes the best financial sense for your situation or if itemizing deductions is the way to go.

Carla Turchetti is a veteran print and broadcast journalist with a passion for money matters and the stories behind the world of small business and personal finance.

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