How to Claim Home Office or Small Business Tax Deductions

Author: Caron Beesley | February 11, 2014

Are you claiming the home office or small business tax deductions for your home-based business? It might sound like a no-brainer, but millions of American home businesses are not!

According to the SBA, more than half of the 27.9 million small businesses in the U.S. are based out of the home, yet the IRS reports that only 3.4 million businesses and salaried employees claimed deductions for business use of a home in 2010.

The reasons often cited are that businesses don’t fully understand the tax law, find it too complicated to calculate the deduction, or are worried that it will trigger an IRS audit (although there’s no evidence to suggest this is true).

The IRS is hoping to change this, and its good news for small businesses. Beginning with the 2013 tax year, the IRS has simplified the process of calculating the home office tax deduction in a bid to save more than 1.6 million hours in tax preparation and provide qualifying home office dwellers with a deduction of up to $1,500 per year (that’s $5 per square foot).

The new simplified method is optional and home business filers can still choose to use the regular method if they choose (this involves listing out itemized costs such as insurance, utilities, repairs, etc.).

But when should you use the new simpler method and claim the flat $5 per square foot deduction versus the more complicated regular method?  Here are some tips and considerations for claiming the home office tax deduction for your small business in 2014.

Who Can Claim the Home Office Tax Deduction in 2013?
Not all home business owners qualify for the deduction. The IRS requires that home offices must meet the following criteria:

You must use your home exclusively and regularly:

  • As your principle place of business, or
  • As a place to meet or deal with clients in the normal course of business, or
  • In any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

The key words here are “exclusively” and “regularly”. Let’s explain this in plain English. In order to claim the deduction, the IRS requires you to use a certain area of your home solely for the purposes of trade or business.

It’s an important distinction. For example, if you use the kitchen table as your workspace for six hours a day, then clear it away for meal times with your family, you can’t claim the deduction because you aren’t using that space “exclusively” as a home office.

If, however, you have a separate room or space in your home that is clearly defined as an office and is used solely and “regularly” for business purposes, then go ahead, make that claim!

How Much Can You Deduct?
Until the IRS introduced the new “simplified option”, home businesses only had one option for calculating the home office deduction. Using this “regular method”, you’d track your actual expenses such as utilities, mortgage, rent, any home repairs, home depreciation, etc. and then calculate your deduction based on the percentage of your home devoted to business. Use IRS Form 8829 to figure out the exact calculation.

However, with the introduction of a new simplified option for calculating the deduction, the IRS has given you a choice. Either use the regular method described above and figure out all your costs, or take the simplified deduction, and claim $5 per square feet up to $300 square feet of home office space.

The IRS provides a useful comparison of the simplified home office deduction option versus the regular method.

If you use the simplified method, you won’t need to keep all your receipts, however, you are still required to meet the same qualifying criteria described above (i.e. the space must be used regularly and exclusively for business).  In addition, if you use the simplified method you won’t be able to depreciate the part of the home used for business, something the regular method allows.

Which Home Office Deduction Method Should You Use?
Obviously you want to compare the potential deduction you can realize using the simplified versus the regular method – the pros and cons of each will come down to your particular circumstance.   Consider the following:

  • If you occupy a home office that’s larger than the 300 square feet cap or you know your actual expenses for 2013 are higher than the $1,500 limit on the simplified method, then you might be better off figuring out your actual costs – just to be sure you are maximizing your claim.
  • If you don’t have a mortgage, haven’t been keeping records of your expenses, or use a very small area of your home for business, then you may be better off with the simplified method.
  • If your business wasn’t very profitable in 2013 another important consideration comes into play – If you use the regular method of calculating your expenses you can roll over any unclaimed expenses and take them next year when you make a profit. With the simplified option you can’t roll over expenses to the next year.

In Summary
If you’ve never claimed the home office deduction and you meet the IRS’ eligibility criteria, now’s the time to do it.  Check out Home Office Deduction page on IRS.gov for a complete overview of the simplified and regular method of claiming the deduction. The IRS has also produced a quick video that explains more about the new simplified home office deduction method.

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