Is the New Simplified Option for Claiming Home Office Deduction Better Than The Old One?

I have a home based business. All home based business owners should understand what the IRS is up to lately in their attempt to help us. The Internal Revenue Service released a statement reminding home-based business owners to claim their home office deductions using the new simplified option. Capped at $1,500 per year based on $5 a square foot for up to 300 square feet, this new optional deduction will reduce the paperwork and record keeping burden of small businesses. The new option is available starting with the 2013 return taxpayers are filing today. Instead of filling out a 43-line form complete with complex calculations of allocated expenses, carryover of unused deductions and depreciation, taxpayers will only need to complete a short worksheet in the tax instruction and enter the result of their return. In 2012, 3.3 million taxpayers claimed home office deductions which totaled to nearly $10 billion.

April 15 is tax time again but the simplified option to claim home office deductions has gotten everyone beaming with joy. This simplified option is particularly beneficial to many real estate professionals who have home offices. However, did the government rip us off by using this new simplified plan?

The IRS will lead you to believe that the simplified method is best because the regular method requires too much record keeping. However, it will only be a good idea to use the new simplified home office deduction only if the deduction you could obtain using the regular method is not much more than $1,500. For example, an entrepreneur with a 100 square foot home office who pays $1,000 a month in rent and utilities would qualify for a $500 deduction with the new simplified option. However, with the regular method, he can obtain a $1,200 deduction which is 10% of $12,000 for a year’s rent. Typically, people with large homes and big home offices will find the regular method a lot more advantageous since their deductible expenses will exceed $1,500. Not being able to deduct depreciation does not make the new option better for homeowners as well.

This means that you should figure out the amount of your deduction using both methods to determine which would give you the bigger deduction. Although the regular method might require more record keeping, you will be able to keep more of your money. Whichever you do choose, you are not obligated to use it in the succeeding year.

So if you choose to have a simplified option this year and find it not convincing, you can always switch back to the regular method for your 2014 taxes.  I am not a CPA, Enrolled Agent or Certified Tax preparer. Please consult your CPA or tax attorney for additional information and advice.