IRS Simplifies Home Office Tax Deductions
The IRS has made home office tax deductions easier. / Credit: Red chair at desk via Shutterstock

If you work from home, the Internal Revenue Service is trying to make your life a little easier this year.

For the first time, the IRS is offering a simplified option for calculating home office deductions that is designed to save home-based business owners and workers the hassle of computing each and every expense for the income tax returns.

Tax expert Barbara Weltman said rather than trying to calculate what portion of the home is used for business and how that breaks down for each bill, such as mortgage interest and utilities, home-based workers now have the option of deducting $5 for each square foot of their home office, up to 300 square feet. Under this method, the most those who work from home can deduct is $1,500. [11 Tax Solutions for Small Businesses]

Weltman said this new process was put into place by IRS officials after they realized just how long it was taking home-based workers to figure out their deductions.

"This is part of the whole push by the federal government to reduce regulatory burden on small businesses," Weltman told Business News Daily.

The IRS estimates that the new filing method will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually. When determining which option to use, home workers need to examine the space in their house that they use for business. Weltman said if it's larger than 300 square feet, they could be costing themselves money by going with the new simplified filing option.

"Or if you have unique costs, such as significant utility costs, and you know, by looking at last year's return, that your deduction greatly exceeded $1,500, then you might want to figure your actual costs," she said.

Before deciding which option to go with, Weltman said home-based workers must first ensure they meet the necessary requirements for the deductions.

"The home has to be your principal place of business or a place you meet and deal with customers, clients, or patients in the ordinary course of business," she said of those who are eligible. "This would be, for example, a CPA who has an office downtown but also uses a home office to meet with clients in her home."

A third option, Weltman said, is if the tax filer has a separate structure that is not attached to the home and used for business. An example would be a florist who has a greenhouse where they grow plants that they then sell in their floral shop.

"Those are the three situations in which you qualify," she said. "So, if you have an office and you just bring work home because it is convenient to work from home, you can't take a home owners deduction."

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Additionally, the area in the home that is being deducted must be used solely for business. Weltman said that can include an entire spare bedroom or attic that is turned into an office, or even just a portion of a room.

"But the space has to be used regularly and exclusively for business, so the kitchen table is never going to cut it," she said.

Home-based workers that qualify also need to know what expenses can and can't be written-off if they are using the traditional method of calculating their deductions. Weltman said if a home office accounts for 10 percent of the home's square footage, then home-based workers can deduct 10 percent each of their monthly bills, such as mortgage interest, home owner's insurance, utilities and real estate taxes. In addition, they can deduct 100 percent of any directly related expenses, such as the cost of having the home office repainted.

Among the things that aren't deductible include lawn care or repairs made to parts of the home that don't include the office.

To protect themselves moving forward, Weltman advises home-based workers to take a photo of their home office just in case the IRS comes asking questions about the return several years down the road.

"You want to be able to show that you actually did use a space regularly and exclusively for business and a picture says a thousands words," she said.

Despite what many people may think, Weltman, who has also partnered with The Hartford on their Business Owners Playbook, doesn't believe taking a home office deduction is an automatic audit red flag.

"Given the fact that there are so many people working from home these days and that the IRS has even gone the extra mile in creating this simplified method, I'm not sure that is really a legitimate concern anymore," she said. "But, I would caution that anyone who wants to take a home office deduction make sure that you do qualify."

Originally published on Business News Daily.