When you run your own small business and work from home, you have a few distinct advantages during tax season. Self-employed individuals are able to deduct a long list of business expenses, which can help decrease your overall taxable income. One of the most lucrative opportunities for small business owners allows you to deduct the expenses associated with running your home office. By claiming a portion of your monthly mortgage or rent as well as other expenses like gas, electricity, repairs, and insurance, you may be able to substantially decrease your tax responsibility and beef up your refund check. Qualifying for the home office deduction does require you to meet several strict rules and provide thorough documentation of your costs, which is why many taxpayers have historically decided not to bother with it. Beginning with this tax year, the IRS has introduced a new method of calculating your overall home office deduction, making it a much less time-consuming process. As it turns out, however, the simplified method might not be all it’s cracked up to be when you consider its limitations. Here is a look at the basics of the home office deduction so you can decide how to calculate it in order to maximize your refund.
How to Qualify
In order to be eligible for the home office deduction at all, you need to use part of your home regularly and exclusively to conduct business. In other words, you can’t claim the deduction if you do work at your dining room table every once in a while but also use that area of your house for eating and socializing. You also have to be able to prove that the home office is your primary place of business. Freelancers who spend all of their time working at home will have no problem meeting this criterion, but employees who are sometimes allowed to telecommute won’t make the cut.
The Regular Method of Deduction
For years, there has only been one acceptable method to calculate your home office deduction. Taxpayers are required to measure the square footage of your home office and then divide it by the total square footage of your home to determine what percentage of your living space is taken up by your office. You can then sum up your total home expenses–including rent/mortgage payments, utilities, and homeowner’s/renter’s insurance–and multiply that figure by the percentage you just calculated. The portion of your home costs that account for your office are all deductible.
The Simplified Method of Deduction
Beginning with tax year 2013 (the taxes you’ll file in 2014 and beyond), the IRS has introduced a simplified method of calculating your home office deduction for small business owners who find the regular method too complex. Instead of needing to calculate your total expenses and take a percentage of them, you can simply deduct $5 per square foot of office space (up to a maximum of 300 square feet). The new method is intended to allow more self-employed individuals who have never considered the home office deduction before to be able to take advantage of the option.
Choosing Your Method
While the simplified method may seem like a great option because it lessens the amount of time and documentation you will need when filing your taxes, there’s a good chance that being lazy will end up costing you. Say, for instance, that you have a home office that is 10 feet by 10 feet. With the simplified method, you would be able to claim 100 square feet at $5 per square foot, so your small business deduction would be $500. Now say that your home is 1000 square feet and your total home expenses each year come out to $25,000. If your office makes up 10 percent of your home, then your deduction would be $2,500 using the regular method of calculation. If a little extra work can increase your deductible expenses by $2,000, it’s probably worth it to put in the time. The simplified method may make it easier to file, but there’s a good chance you’ll sacrifice a portion of your refund if you opt to try it out.