The New Home Office Deduction

August 14, 2013

Home Office Deduction

The Home Office Deduction is available to those who use a part of their home for business purposes, allowing a deduction for the business use of the home.  The deduction is available to homeowners and renters, and starting this year, the calculation of the deduction has become a lot easier for most people.

The basic requirements remain the same.  You must regularly use a part of your home exclusively for business purposes.  For example, running your business out of a room where your business computer and desk are, and where the kids are not supposed to enter.  It need not be that specific, as long as there is a portion of the home taken up exclusively for business purposes, that should suffice.  The second requirement is that your home be your principal place of business.  That isn’t to say that it needs to be an exclusive place of business, you can still have an office elsewhere to carry on work, but your home must be a place where you substantially and regularly conduct business.

So how much is the deduction?

The regular method of figuring out the amount, which was the only method to be used through 2012, is to determine the actual expenses that could be deductible, such as mortgage interest, utilities, depreciation, insurance, repairs, etc., and then multiply those expenses by the ratio representing the square footage of your home used for business compared to the total square footage of the home.  For example, if you have a 100 sq. ft. office in your 1000 sq. ft. home, and your mortgage interest, utilities and other deductions for the year add up to $4520, your deduction would be $452 (100/1000 x $4520).

For the new simplified option, available starting this year, you need only figure out the square footage of the business use of your home and apply a $5 per sq ft standard rate.  So, using that last example, the deduction would be $500 (100 sq. ft. x $5 per sq. ft.).  You don’t have to worry about adding up the actual expenses and then applying the portion attributable to the business use, you can just take the standard rate amount of the deduction and be done with it.

You can use either method starting in 2013, which means you should use whichever maximizes your savings.  Here are a couple of things to keep in mind when you are deciding which to use:

- Expenses such as the mortgage interest, which would typically be claimed on a Schedule A for those who itemize, needs to be apportioned between the personal and business use when using the regular method, which ensures that you don’t claim the same expense twice.  If you are using the simplified option, you don’t have to worry about the apportionment and claim those expenses in full on the Schedule A.

- The simplified option is only allowed for up to 300 sq. ft. of business use of the home.  There is no limit under the regular method beyond the percentage use of the home as described above.

- There is no depreciation deduction under the simplified option.  On the one hand, that makes things a lot easier, but on the other, that could be a significant expense allowed through the regular method.  Also, to the extent that there is gain on the sale of a home that has been depreciated under the regular method, that recaptured gain is taxed at ordinary rates, a problem avoided using the simplified method.

- To the extent that there is a loss attributable to this deduction, that loss can be carried forward using the regular method, but not the simplified option.  Also, use of the simplified option also prevents claiming a carryover loss in the current year that was created from the use of the regular method in a prior year.